Fed Sees ‘Downside Risks’; Leaves Policy Unchanged
Federal Reserve policy makers said the economy has picked up while “significant downside risks” remain, and they refrained from taking any additional steps to ease monetary policy.
“Economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year,” the Federal Open Market Committee said today in Washington after a two-day meeting. At the same time, it repeated that “there are significant downside risks to the economic outlook, including strains in global financial markets.”
The statement may reflect the desire of policy makers led by Chairman Ben S. Bernanke to see if the unconventional policy steps unveiled at their last two meetings help the expansion gain strength before embarking on new initiatives. While the economy grew last quarter at the fastest pace in a year, that is still insufficient to push down the unemployment rate, and officials have said the U.S. remains vulnerable to shocks from the European debt crisis.
Treasuries remained lower after the statement, with the 10- year yield at 2.03 percent at 12:56 p.m. in New York, compared with 1.99 percent late yesterday. The Standard & Poor’s 500 Index rose 1.4 percent to 1,234.99 after a report showed companies added more workers to payrolls than estimated.
Benchmark Rate
The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” The central bank has kept the target federal funds rate in a range of zero to 0.25 percent since December 2008.
“The committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability,” the statement said.
Fed officials will release their economic forecasts for 2011-2014 at 2 p.m. today, and Bernanke plans to hold a press conference at 2:15 p.m. in Washington.
The central bank also said it would continue its plan to purchase $400 billion of longer-term U.S. bonds by June 2012 while selling the same amount of short-term debt, a program known as Operation Twist. It also will continue reinvesting proceeds from housing debt into mortgage-backed securities.
Inflation Moderates
Inflation “appears to have moderated since earlier in the year,” the statement said, repeating earlier language. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.6 percent in September from a year earlier, compared with a 1 percent gain in March. Including all items, prices rose 2.9 percent in September from a year earlier, the quickest pace since October 2008.
“Household spending has increased at a somewhat faster pace in recent months,” the statement said. “The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.”
The vote for the statement was 9-1. Chicago Fed President Charles Evans voted against the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation.”
At the last two meetings, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia’s Charles Plosser dissented against decisions to ease policy. They supported today’s statement.
Laying Groundwork
Economists in a Bloomberg News survey predicted Fed officials would lay the groundwork for further large-scale asset purchases while refraining from making such a decision at today’s meeting. A plurality of 36 percent saw purchases beginning in the first quarter of 2012.
With the benchmark interest rate already at zero, the central bank bought $2.3 trillion in debt from December 2008 through June of this year in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers.
Some officials in September wanted to keep further asset purchases as an option to boost the economy as policy makers saw “considerable uncertainty” that U.S. growth will pick up, according to minutes of the meeting, released on Oct. 12.
Stocks have climbed and the economy has picked up since the Sept. 20-21 gathering. The Standard & Poor’s 500 Index advanced 11 percent in October, the best since 1991, as European leaders agreed to expand their bailout fund. The rally snapped five months of losses.
Corporate Profits
Profits for companies in S&P 500 climbed 19 percent on average in the third quarter, based on results reported so far. Earnings are beating analyst predictions by 5.8 percent, compared with an average rate of 3.3 percent since 2005.
Last week, the Commerce Department reported that the economy grew at a 2.5 percent annual pace in the third quarter, compared with 0.4 percent in the first quarter and 1.3 percent in the second.
Treasuries rallied this year as investors sought the safety of U.S. debt amid global economic turmoil. The yield on the 10- year Treasury note fell to a record low of 1.72 percent on Sept. 22, the day after the Fed announced Operation Twist, from a 2011 high of 3.74 percent in February.
Treasury Returns
Treasuries have returned 8.8 percent this year, the most since U.S. government debt returned 14 percent in 2008 in the midst of the financial crisis, according to Bank of America Merrill Lynch index data.
Household spending accelerated in September, while manufacturing maintained its expansion in October in the face of slowing overseas demand and a gauge of consumer sentiment unexpectedly rose.
Caterpillar Inc., the world’s largest construction and mining-equipment maker, is among firms reporting continued growth. The Peoria, Illinois-based manufacturer added 4,800 jobs in the third quarter, 2,000 of them in the U.S., and said its revenue in 2012 will rise 10 percent to 20 percent.
“Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point,” Chief Executive Officer Doug Oberhelman said in an Oct. 24 statement.
Honeywell International Inc. raised its full-year earnings forecast amid a recovery in commercial aerospace and increasing sales of auto turbochargers. Boeing Co., the Chicago-based planemaker, increased its outlook after boosting output to record levels to meet demand from airlines seeking more fuel- efficient jets.
FedEx Corp.
FedEx Corp., based in Memphis, Tennessee, also expects growth: the operator of the world’s largest cargo airline plans to hire 20,000 seasonal workers, 18 percent more than last year, to handle a surge in holiday deliveries.
Still, growth and job creation haven’t been fast enough to lower the unemployment rate.
The Labor Department will report Nov. 4 that the payrolls expanded by 95,000 jobs in October, according to the median estimate of a Bloomberg survey of 65 economists. Unemployment is forecast to remain at 9.1 percent for the fourth consecutive month.
Housing, the industry at the heart of the financial crisis, has also held back the recovery. Sales of previously owned homes fell 3 percent in September to a 4.91 million annual rate, according to the National Association of Realtors. The median price dropped 3.5 percent from a year earlier, and about one in five real-estate agents polled said contracts had been canceled, the group said.
Housing ‘Albatross’
“Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole,” Fed governor Daniel Tarullo said in an Oct. 20 speech, urging his fellow policy makers to consider further purchases of housing debt to lower mortgage costs and help homeowners refinance.
Policy makers have also been considering communications tools to help shape public expectations for the future path of interest rates. A subcommittee led by Fed Board Vice Chairman Janet Yellen has looked into publishing more precise information about the FOMC’s goals for prices and employment, and more guidance about how policy changes are linked to those goals, according to minutes of the September meeting.
“They’re trying to get people to stop believing in Japan- style economic stagnation,” Michael Dueker, a former St. Louis Fed economist, now the chief economist for Russell Investments North America, said in a phone interview before the Fed’s meeting. “In order to avoid the Japan scenario I think strong action is called for.”
Republican Criticism
The central bank’s recent stimulus steps have drawn criticism from Republican congressional leaders. Senate Minority Leader Mitch McConnell and House Speaker John Boehner sent Bernanke a letter on Sept. 19, the day before the Fed’s previous meeting, asking him to refrain from undertaking new stimulus.
They said the Fed should avoid “further harm” to the U.S. economy, and said the central bank ought to provide “ample data proving a case for economic action and quantifiable benefits to the American people.”
Bernanke has also drawn fire from Republican presidential candidates, with former Massachusetts Governor Mitt Romney, businessman Herman Cain, Texas Governor Rick Perry, former Speaker of the House Newt Gingrich and Congressman Ron Paul all indicating they’d appoint a new Fed chair if they won the presidency in 2012. Bernanke’s term as Fed chief ends in January of 2014.
