By Joshua Zumbrun
The Federal Reserve for the first time linked the outlook for its main interest rate to unemployment and inflation and said it will expand its asset purchase program by buying $45 billion a month of Treasury securities starting in January to spur the economy. “The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington today after a meeting of the Federal Open Market Committee. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said. Rates will stay low “at least as long” as unemployment remains above 6.5 percent and if inflation is projected to be no more than 2.5 percent, the FOMC said in a statement. The thresholds replace the Fed’s earlier view that rates would stay near zero at least through the middle of 2015. The move to economic thresholds represents another innovation by Bernanke, a former Princeton University professor and Great Depression expert who has stretched the bounds of monetary policy as he battled the recession and then sought to jolt the world’s biggest economy out of a subpar recovery. “The Fed has been very active since the crisis began, and they are feeling some time pressure because the longer Americans stay unemployed, the harder it is to incorporate them back into the labor force,” said Dana Saporta, a U.S. economist at Credit Suisse Group AG in New York. Stocks Rise Stocks erased gains as Bernanke said the Fed can’t offset the full impact in case the Obama administration and Congress can’t reach an agreement to avoid automatic tax increases and spending cuts set to take effect next year. The Standard & Poor’s 500 Index was little changed at 1,428.48 at the close of trading in New York after earlier rising as much as 0.8 percent. Treasuries fell on concern additional bond purchases would fuel inflation. The yield on the 10-year Treasury note rose five basis points to 1.70 percent. Bernanke said tying the outlook for interest rates to economic variables is a better way to communicate the policy outlook than using a time horizon because markets can “infer how our policies will evolve.” “If information comes in which says the economy is stronger or weaker than we expected, that would in principle require a change in the date, but it doesn’t necessarily require a change in the thresholds, because that data adjustment can be made by markets just simply by looking at their own forecasts,” he said. Rate Forecast While the FOMC dropped its calendar-based guidance on interest rates, it said the new thresholds are “consistent” with the previous outlook. A majority of Fed officials don’t expect to raise the main interest rate until 2015, when the jobless rate is forecast to fall to between 6 percent and 6.6 percent, according to projections released after the statement. The bond buying announced today will be in addition to $40 billion a month of existing mortgage-debt purchases. The FOMC said asset buying will continue “if the outlook for the labor market does not improve substantially” and hasn’t set a limit on the program’s size or duration. The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings. The decision to embark on outright Treasury purchases doesn’t “significantly” increase the level of monetary stimulus, Bernanke said. The Fed “intends to be flexible” in setting the pace of its asset purchases, and will use “qualitative” criteria to determine the size of its bond- buying program, he said. Maturing Debt FOMC participants today lowered their forecasts for growth next year. They now see the economy expanding 2.3 percent to 3 percent, compared with 2.5 percent to 3 percent in September. Estimates for 2014 are from 3 percent to 3.5 percent, versus 3 percent to 3.8 percent in the previous projection, according to the so-called central tendency of 19 estimates, which excludes the three highest and three lowest. Fed officials met as the economy showed few signs of reaching the pace of growth needed to put 12 million unemployed Americans back to work. While housing and auto sales have picked up, business spending and exports -- two drivers of the three- year expansion -- have cooled amid slowing global growth. The world’s largest economy next year is forecast to expand 2 percent, according to the median estimate in a Bloomberg survey of economists, compared with an average of 3 percent in the 10 years through 2007. ‘Stronger Recovery’ “Part of the reason we are engaging in these policies is to try and create a stronger economy, more jobs, so that folks across the country, including places like the one where I grew up, will have more opportunities to have a better life for themselves,” said Bernanke, 58, whose hometown is Dillon, South Carolina. Three years into the recovery, the 7.7 percent jobless rate remains higher than Fed officials’ estimates for full employment, which range from 5.2 percent to 6 percent. Employers added 146,000 workers to payrolls in November, less than the monthly average of 151,000 this year and the 153,000 in 2011. Job growth is “still disappointing and still falls short of what they want to see,” Julia Coronado, chief economist for North America at BNP Paribas SA in New York and a former Fed economist, said before today’s statement. Fiscal Talks The Fed acted in its last regular meeting of the year as lawmakers and the Obama administration continue talks to avert more than $600 billion of automatic spending cuts and tax increases that threaten to throw the country into a recession. The so-called fiscal cliff is a “major risk factor” that is already harming investment and hiring decisions by causing “uncertainty” or “pessimism,” Bernanke said. The Fed “doesn’t have the tools” to offset that event, he said. Inflation expectations climbed after the Fed’s announcement. The break-even rate for five-year Treasury Inflation Protected Securities -- a yield differential between the inflation-linked debt and Treasuries -- rose to 2.1 percentage points from 2.07 points yesterday. That’s a measure of the outlook for consumer prices over the life of the securities. The Fed targets inflation of 2 percent. Fed purchases of mortgage debt have helped push interest rates on home loans to record lows, spurring a revival in the industry that was at the heart of the financial crisis. Home Construction Construction of new houses in October began at the fastest pace since 2008 as builders broke ground on 894,000 units at an annual pace. Prices rose 3 percent from a year earlier in September, according to the S&P Case-Shiller index of home prices in 20 cities. Lowe’s Cos., the second-largest U.S. home-improvement retailer, has rallied 37 percent this year as consumers spend more on appliances, hardware and tools. Still, U.S. exports have cooled as a global growth slowdown curbs demand for American goods. That, along with the risk of fiscal tightening in the U.S. next year, has prompted companies to limit capital spending. With interest rates near zero and an expanded balance sheet, the Fed’s power to address a slowing economy in 2015 may be limited, Bernanke said. “The ability to provide additional accommodation is not unlimited,” he said. “That is an argument for being somewhat more proactive now and try to get the economy back to a healthy condition.” Richmond Fed President Jeffrey Lacker dissented for the eighth consecutive meeting, saying he opposed the asset purchase program. Lacker opposed the FOMC’s June decision to extend Operation Twist through the end of the year along with additional asset purchases, saying more bond buying probably won’t quicken economic growth. To contact the reporters on this story: Joshua Zumbrun in Washington at [email protected] Jeff Kearns in Washington at [email protected]; Caroline Salas Gage in New York at [email protected] To contact the editor responsible for this story: Chris Wellisz at [email protected] http://www.reuters.com/article/2012/12/05/us-usa-fed-idUSBRE8B219420121205
By Alister Bull (Reuters) - The Federal Reserve is set to announce a fresh round of Treasury bond purchases when it meets next week, avoiding monetary policy tightening to maintain support for the weak U.S. economy amid uncertainty over the looming year-end "fiscal cliff." Many economists think the U.S. central bank will announce monthly bond purchases of $45 billion after its policy gathering on December 11-12, signaling it will continue to pump money into the U.S. economy during 2013 in a bid to bring down unemployment. "We expect status quo," said Laurence Meyer of the forecasting firm Macroeconomic Advisers. "We expect purchases will continue at the same monthly rate as over the last three months; that the composition will be the same, and that the maturities distribution will be the same." The decision would cement expectations that the Fed will keep buying a combined $85 billion of Treasuries and mortgage-backed bonds a month, while repeating that it expects to hold interest rates near zero until at least mid-2015. The Fed could even decide to announce a larger level of purchases if it wanted to exceed expectations and give the market a bigger jolt to press borrowing costs lower. "If the market expects $45 billion, maybe they should deliver $60 billion ... get markets more excited and really push rates down," said Torsten Slok with Deutsche Bank in New York. U.S. unemployment remains high at 7.9 percent and the economy, while doing better than Europe's, is expected to grow at a meager rate of only around 2 percent next year. OPERATION TWIST The fresh bond purchases will replace a program called Operation Twist, which expires at the end of the year. Under Twist, the Fed bought $45 billion of longer-dated bonds a month with the proceeds from the sale of its shorter-date holdings. Fresh outright purchases would therefore create new money, whereas no new action by the Fed would amount to a tightening in monetary policy as Twist came to an end. Add in monthly $40 billion mortgage-backed bond purchases which it began in September, this would boost the Fed's balance sheet by $1.2 trillion, to $4 trillion, by end-2013 if it keeps buying assets at this pace, as economists expect. "I think it is going to be (maintained) into 2014 because they are not looking for much improvement in the unemployment rate over 2013," said Stephen Oliner, a resident scholar at the American Enterprise Institute. The Fed has promised to maintain its efforts to stimulate growth until it sees a substantial improvement in the outlook for the U.S. labor market. THRESHOLDS However, it has not spelled out exactly what that means and is not likely to use next week's meeting to act on an idea advanced by some senior Fed officials to adopt numerical thresholds for unemployment and inflation to guide policy. These have been floated as a better way to give markets and the public so-called forward guidance on when the Fed will start raising rates, rather than its current calendar date commitment. The idea is to create a tolerance zone within which the Fed would leave rates on hold. But economists think it would prefer not to risk confusing markets by making too many big announcements when it releases its policy decision on Wednesday, expected at 12:30 p.m. ET. The statement will be followed by a news conference with Fed Chairman Ben Bernanke. Analysts also doubt policymakers have had enough time to reach a consensus on measures that amount to a major step forward for the central bank's communication strategy that would influence Fed policy for years to come. "At this point, I'd be a little surprised if they had actually managed to reach agreement about what the quantitative thresholds should be," said David Stockton, senior fellow at the Peterson Institute for International Economics in Washington. Both Bernanke and Vice Chair Janet Yellen have indicated support for the idea, which has been advanced by several of their colleagues. But analysts felt it made more sense to take the step in the early part of next year and concentrate on explaining the decision to increase asset purchases at the news conference next week. Policymakers must also update quarterly economic forecasts despite uncertainty over how much of a drag fiscal policy will exert on growth as Congress and the Obama administration fight over taxes and spending designed to lower the U.S. deficit. Failure to agree on a deal could tip the economy over a so-called fiscal cliff of tax hikes and automatic spending cuts, which many fear could trigger another U.S. recession, and which the Fed has repeatedly said it would not be able to offset. |
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