Federal Reserve officials kept their plan to expand record monetary stimulus, saying the economic expansion hasn’t been strong enough to reduce joblessness.
The Fed’s $600 billion of Treasury purchases are aimed at boosting a recovery that has been “disappointingly slow” and keeping prices stable “over time,” the Federal Open Market Committee said in a statement today in Washington. The central bank repeated its pledge to leave the benchmark interest rate low for an “extended period.”
Chairman Ben S. Bernanke is bucking criticism from top Republican lawmakers by sticking with unconventional efforts to lower an unemployment rate persisting near a 26-year high. Gains in manufacturing, retail sales and inflation expectations indicate asset purchases may be helping. The strengthening dollar has defied skeptics who said the policy would weaken the currency.
Stocks held gains and 10-year Treasurys declined after the statement. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,243.34 at 2:48 p.m. in New York. The yield on the 10-year Treasury note rose to 3.45 percent from 3.28 percent late yesterday.
The recovery “is continuing, though at a rate that has been insufficient to bring down unemployment,” the Fed statement said. “Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”
Fed officials left their target for the federal funds rate, which covers overnight interbank loans, in a range of zero to 0.25 percent, marking two years of the policy. The central bank is likely to wait until the first quarter of 2012 to raise the rate, based on the median estimate in a Dec. 2-8 Bloomberg News survey of economists.
“The unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate,” the Fed said, repeating language from last month’s statement.
Republican lawmakers, including Indiana Representative Mike Pence, want to jettison the half of the Fed’s legislative mandate that focuses on maximum employment so as to concentrate on stable prices alone.
“Measures of underlying inflation have continued to trend downward,” the statement said.
Kansas City Fed President Thomas Hoenig, the longest- serving policy maker, voted against the FOMC decision for the eighth straight time, reiterating his view that the “continued high level of monetary accommodation” may eventually “destabilize the economy.” He tied former Governor Henry Wallich’s record in 1980 for most dissents in one year.
The $600 billion of purchases are in addition to long-term Treasurys the Fed is buying by reinvesting proceeds from maturing mortgage debt, a policy begun in August. Combined purchases through June will total $850 billion to $900 billion, or about $110 billion a month, the Fed said Nov. 3. Policy makers reiterated they will “regularly review” the purchase program and adjust it as needed.
The central bank has bought $114.1 billion of Treasurys since Nov. 12, when it began purchases under the program dubbed QE2 for the second round of so-called quantitative easing. The Fed bought $1.7 trillion of mortgage debt and Treasurys in the first round through March 2010.
Thirty-eight of 39 analysts in a Bloomberg News survey taken Dec. 7-8 forecast the Fed would leave its bond-buying program unchanged. Eight of 37 said the Fed would ultimately buy more than the $600 billion planned through June, and two said it would buy less.
Signs of Strength
Signs of economic strength, along with prospects for additional fiscal stimulus, have pushed Treasurys lower, with the 10-year yield rising to 3.28 percent yesterday from 2.57 percent on Nov. 3, the day of the action. The Standard & Poor’s 500 Index has risen 3.6 percent through yesterday, while the dollar has climbed 3.8 percent against a basket of six currencies.
Inflation expectations for the next five years, as measured by the breakeven rate between nominal and inflation-indexed bonds, rose to 1.58 percent yesterday from 1.47 percent on Nov. 3.
Some data point to the U.S. recovery gaining strength in the sixth quarter since the end of the worst recession in seven decades. Sales at U.S. retailers last month rose more than forecast, a government report showed today. Manufacturing expanded for a 16th consecutive month in November, and a measure of consumer confidence increased in December to a six-month high.
The global economy is in a “clear” recovery that is boosting confidence in the trucking industry, Richard Giromini, chief executive officer of truck maker Wabash National Corp., said in an interview yesterday on Bloomberg Television’s “InBusiness With Margaret Brennan.”
At the same time, employment remains stalled. Payrolls expanded by 39,000 jobs in November, and the jobless rate jumped to 9.8 percent from 9.6 percent, compared with the median analyst forecasts for an addition of 150,000 and no change in an unemployment rate that has stayed at 9.4 percent or higher since May 2009.
In 2008, people “would have called you a lunatic” if you said U.S. interest rates would be at zero for two years, said Paul Dales, U.S. economist at Capital Economics Ltd. in Toronto. Now, “it’s not too hard to see doing it for another two years.”
Inflation excluding food and fuel costs, as measured by the personal consumption expenditures price index, fell to 0.9 percent in October, the slowest pace since records began in 1960. Central bankers prefer a long-run rate of 1.6 percent to 2 percent for the so-called core PCE gauge.
“Given the current economic environment, most restaurant companies, including ours, have been reluctant to take the kind of price increases that would be necessary to offset the commodity inflation that has occurred this year,” Andrew Puzder, chief executive officer of CKE Restaurants Inc., operator of the Carl’s Jr. and Hardee’s hamburger chains, said on a Dec. 8 conference call. CKE, based in Carpinteria, California, was bought in July by an affiliate of Apollo Management LP.
Bernanke, who turned 57 yesterday, said in a Nov. 19 speech that there are limits to what the Fed can do alone and called for “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits” as a complement to central bank actions.
The Fed chief may get the first part. Congress this week is voting on an estimated $858 billion compromise tax package that would temporarily keep Bush-era tax cuts for all Americans. That may reduce the odds of the Fed expanding Treasury purchases beyond $600 billion, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said last week.
Pacific Investment Management Co., which manages the world’s biggest bond fund, raised its forecast for growth next year in response to the stimulus, Chief Executive Officer Mohamed El-Erian said last week. It now sees the economy growing 3 percent to 3.5 percent in the fourth quarter of next year from the same period of this year, up from 2 percent to 2.5 percent growth, El-Erian said.
That’s in line with the median projections of Fed policy makers last month. Central bankers see an unemployment rate of 8.9 percent to 9.1 percent in the fourth quarter of 2011.
The Fed’s purchases will do more harm than good to the U.S. economy, John Boehner, the Ohio Republican nominated to be House speaker, and the three other top Republicans in the House and Senate said in a Nov. 17 letter to Bernanke.
Bernanke responded by sitting for a interview with CBS Corp.’s “60 Minutes” program that aired Dec. 5, his first televised sit-down with a news organization since July 2009.
“We’re not very far from the level where the economy is not self-sustaining,” Bernanke said. It’s possible the Fed may expand bond purchases beyond $600 billion, he said.
The tension sets the stage next year for clashes between Bernanke and Republican lawmakers, who won control of the House and reduced Democrats’ Senate majority in the November midterm elections.
Representative Ron Paul of Texas, author of the book “End the Fed,” will chair a House subcommittee overseeing the central bank. The House Oversight Committee will be led by California Republican Darrell Issa, who is aiming for increased Fed transparency, such as shortening the five-year delay on releasing FOMC meeting transcripts.
“The cost of independence for the Fed is, at some point you’ve got to be a whipping boy,” said Vincent Reinhart, a former Fed monetary-affairs director who’s now a resident scholar at the American Enterprise Institute in Washington.
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