NY Times
The Federal Reserve signaled on Wednesday it was not close to raising interest rates, saying that the economy remained weak even though the recession appeared to be over, Edmund L. Andrews writes in The New York Times.
In a move that could spell the continued success of investment banks’ fixed-income units, the Fed said it would keep its benchmark interest rate at virtually zero, and it made no change to its longstanding mantra that economic conditions were likely to warrant “exceptionally low” rates for “an extended period.”
For practical purposes, analysts said, policy makers are still at least six months away from tightening monetary policy.
“Economic activity has continued to pick up,” the central bank said in a statement after its two-day policy meeting. But policy makers quickly cautioned that consumer spending would be sluggish, businesses were still cutting back and economic growth would be “weak for a time.”
Despite speculation that the Fed might hint about raising interest rates in order to head off future inflation, it was unclear on Wednesday whether policy makers even discussed a change in the wording of their guidance.
Policy makers did elaborate on the economic indicators they will be watching most closely. Those will be the level of “resource utilization,” which primarily means the unemployment rate, the trend in inflation, and the stability of inflation expectations.
In a move that could spell the continued success of investment banks’ fixed-income units, the Fed said it would keep its benchmark interest rate at virtually zero, and it made no change to its longstanding mantra that economic conditions were likely to warrant “exceptionally low” rates for “an extended period.”
For practical purposes, analysts said, policy makers are still at least six months away from tightening monetary policy.
“Economic activity has continued to pick up,” the central bank said in a statement after its two-day policy meeting. But policy makers quickly cautioned that consumer spending would be sluggish, businesses were still cutting back and economic growth would be “weak for a time.”
Despite speculation that the Fed might hint about raising interest rates in order to head off future inflation, it was unclear on Wednesday whether policy makers even discussed a change in the wording of their guidance.
Policy makers did elaborate on the economic indicators they will be watching most closely. Those will be the level of “resource utilization,” which primarily means the unemployment rate, the trend in inflation, and the stability of inflation expectations.
officials have made it clear they thought unemployment and slow growth were still the main economic threats
The government estimated last week that the nation’s economy grew at an annual pace of 3.5 percent in the third quarter, its first quarterly expansion in a year. But much of that activity stemmed from temporary stimulus measures like the home buyers’ tax credit and the “cash for clunkers” program.
The Fed chairman, Ben S. Bernanke, has cautioned that the recovery was fragile and that unemployment would remain high through the end of next year. The average forecast of Fed policy makers anticipates that the jobless rate, now 9.8 percent, will peak above 10 percent next year and remain well above 9 percent until some time in 2011.
Within the central bank, officials have begun debating when they should start signaling a rollback of its rescue measures. But while some of the Fed’s more hawkish policy makers have publicly suggested it might soon be time for tighter policy, Mr. Bernanke and other officials have made it clear they thought unemployment and slow growth were still the main economic threats.
The central bank did make a tiny reduction in its effort to prop up the mortgage market. It said it would buy slightly fewer bonds issued by agencies that guarantee home loans — $175 billion, rather than $200 billion it originally expected. But it said the change stemmed from a shortage of such securities. The Fed made no change to its much bigger program to buy $1.25 trillion worth of mortgage-backed securities by the end of next March.
“The one consistent theme with all the Fed speakers is that they’re not going to raise rates any time soon,” said Drew Matus, a senior economist at Bank of America-Merrill Lynch. “That is the one consistent theme that gets hammered home time and again.”
Beyond saying that “economic conditions” would continue to warrant “exceptionally low” rates, policy makers said those conditions included “low rates of resource utilization,” “subdued inflation trends” and “stable inflation expectations.”
Fed officials face competing challenges as they try to get monetary policy back to normal over the next several years. They need to make a judgment about timing — tightening too early could send the economy back into a downturn, as happened during the late 1930s; waiting too long would set the stage for inflation.
But policy makers also want to avoid jolting financial markets, which will require them to communicate their plans in advance. They are also grappling with novel questions about their exit strategy. In their statement on Wednesday, Fed officials made it clear they were still seeing little risk of higher inflation, adding that “substantial resource slack” — a euphemism for high unemployment and unused factory capacity — would keep inflation “subdued.”
The Fed’s preferred measure of inflation, which excludes prices of food and energy, has climbed by less than 1.5 percent over the last year, well within Mr. Bernanke’s unofficial comfort range of 1 to 2 percent.
The overnight Federal funds rate, the interest rate that banks charge for lending their reserves to each other, has been held between zero and 0.25 percent since last December.
In addition, the Fed has tried to pump up financial markets and the economy by more than doubling the size of its balance sheet, creating more than $1 trillion in new money for its emergency credit programs and to drive down long-term interest rates by buying Treasury bonds and mortgage-backed securities.
Fed officials have already cut back some of their emergency loan programs and stopped buying Treasury bonds, and they have said they would soon stop buying mortgage securities.
To tighten monetary policy, Fed officials will have to raise interest rates and start cutting the size of its balance sheet by selling the securities it has acquired.
