Fed strategy targets job growth, housing market recovery
BY DAVID ROEDER Business Reporteremail@example.com September 13, 2012 7:46AM
The rate decision of the Federal Reserve is announced on a television screen on the floor of the New York Stock Exchange Thursday, Sept. 13, 2012. The Federal Reserve unleashed a series of aggressive actions Thursday intended to stimulate the still-weak economy by making it cheaper for consumers and businesses to borrow and spend. (AP Photo/Richard Drew)
A comparison of the Federal Reserve’s statements from its two-day meeting that ended Thursday and its meeting July 31-August 1:
August: The Fed said it would “continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June.”
September: The Fed “agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June ... These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
Then: The Fed inched closer to further action by saying it would “closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery.”
Now: The Fed is also promising to do even more if necessary: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”
Then: The Fed “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Now: The Fed is extending the timeline for its ultra-low interest rates by about six months. It “currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
Then: The Fed “expects economic growth to remain moderate over coming quarters and then to pick up very gradually.”
Now: The Fed “is concerned that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
RECOVERY AND BEYOND:
Now: The Fed promised Thursday for the first time to continue its efforts even after the recovery improves: “To support continued progress toward maximum employment and price stability, the (Fed) expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
Updated: October 15, 2012 9:47AM
The Federal Reserve, stretched to the limit of its power, Thursday settled on an aggressive bond-buying campaign aimed squarely at boosting the housing market and consumer attitudes.
Faced with slow growth and increases in long-term unemployment and discouraged job-seekers, the Fed’s policymaking committee agreed on an open-ended commitment to buy mortgage securities. The step is designed to further trim historically low interest rates and make home buying more affordable.
The Fed’s Open Market Committee also lengthened its commitment to keep overall interest rates at close to zero percent. It promised to do so through mid-2015, more than halfway through the next presidential term. Its prior pledge extended to the end of 2014.
Analysts were skeptical of the long-term impact of the Fed’s third round of asset purchases, a process called “quantitative easing.” Earlier QE versions helped the economy, but weren’t enough to erase the effects of a withering recession that ended officially in 2009, but lingers in spirit.
“If cutting long-term interest rates by a small amount was going to generate a whole lot of new economic activity, you would think that it would already have been working,” said Austan Goolsbee, economics professor at the University of Chicago, in an online interview with the Wall Street Journal. Goolsbee is a former chairman of the White House’s Council of Economic Advisers.
Federal Reserve Chairman Ben Bernanke, at a news conference, said the asset purchases are a “nudge” for the economy and acknowledged their impact could be slight. “We’re looking for policymakers in other areas to do their part,” Bernanke said.
While he didn’t expand on that point, Bernanke has urged Congress and the president to settle on budgetary issues and head off a threatened “fiscal cliff” of mandated tax hikes and spending cuts early next year.
Bernanke observed that the Fed’s spending has nothing to do with government deficits, as his agency is buying securities for later sale and not spending on goods or services.
The Fed’s move caused stocks to rally. The Dow Jones industrial average jumped 206.51 points and closed at 13,539.86, up 1.55 percent for the day. Oil prices rose nearly 1 percent on growth optimism while gold for December delivery leapt 2 percent to $1,772.10 per ounce, representing a bet that the Fed’s activism will bring on inflation.
Geoffrey Hewings, director of the Regional Economics Applications Laboratory at the University of Illinois, said the Fed’s actions will help housing if they spur job creation. “This is the major drag on the housing market right now,” he said. Hewings assembles data for the Illinois Association of Realtors.
While the Fed’s support for the economy played well with stock traders, others have criticized its intervention as doing more for Wall Street and the big banks than for most Americans.
Bernanke addressed criticisms of QE III with reporters. “This is a Main Street policy because what we’re about is trying to get jobs going,” he said.
He said the nation has recovered fewer than half of the 8 million jobs lost in the recession. The four-year anniversary of a key event in that recession, the bankruptcy of Lehman Brothers, is Saturday.
“The weak market job market should concern every American,” Bernanke said, citing a growing proportion of long-term unemployed people who are losing skills and connections to the job market.
Carl Tannenbaum, chief economist for Northern Trust Corp., said the Fed had been telegraphing QE III as Bernanke has sharpened his commentary about the job market. A speech Bernanke gave in late August at a retreat in Jackson Hole, Wyo., was unusually blunt for a central banker, calling the labor situation a “grave concern” that implies “waste of human talent.”
Tannenbaum said the Fed hopes improvement in housing will brighten the outlook of consumers and investors.
On an 11-1 vote, the Fed committee agreed to spend up to $40 billion a month on mortgage bonds. Paul Ashworth, economist at Capital Economics, said three years at that rate would add $1.4 trillion to the Fed’s stimulus efforts, almost as much QE I, which cost $1.7 trillion.
The Fed’s second bond-buying program cost $600 billion in 2010 and 2011.
“I doubt it will be enough to get the economy on track,” Ashworth said of QE III. He said the markets will quickly start speculating on when the Fed will raise its $40-billion-a-month commitment.
Some analysts said the Fed would keep on buying until the unemployment rate hits 6 percent, a prospect most concede is a long way off. Bernanke, however, declined to state a target rate.
He said three concerns are holding the economy back: European debt woes, tight credit markets that prevent many people and businesses from getting loans, and government spending cuts.
Northern Trust’s Tannenbaum said banks are being prudent after the excesses of a few years ago. “It’s not unusual to see underwriting standards become more conservative after a recession,” he said.
Contributing: Sandra Guy