The Federal Open Market Committee (FOMC) today (Wednesday) announced that it would leave its benchmark federal funds rate at a record low range of 0-0.25% for an extended period, despite recent signs that the U.S. economic recovery is accelerating.
Most analysts anticipate the Fed will maintain its loose monetary policy well into 2010, as the economic recovery, while gathering steam, remains fragile. Job losses abetted in November and the unemployment rate slid to 10% from a 26-year high of 10.2% in October. And while construction of new homes rose to an annual rate of 574,000 last month - 8.9% above the October rate 527,000 - that's still 12.4% below the 655,000 rate reached in November 2008.
"Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months," the FOMC said. However, "businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls."
Other key indicators such as capacity utilization also suggest the economy, despite recent improvement, is operating below its potential. Thus inflation is not likely to take root in the economy for some time.
"With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time," said the Fed statement.
U.S. Federal Reserve Chairman Ben S. Bernanke has pointed out that some of the Fed's emergency lending facilities automatically wind down as the economy recovers, because they have onerous pricing and terms. Bernanke anticipates that most of the Fed's special liquidity facilities - including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and the Term Securities Lending Facility - will expire on Feb. 1.
The Fed will attempt to close its temporary liquidity swap arrangements by Feb. 1, and expects that the amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31, for loans backed by all other types of collateral.
Still, Bernanke will at some point have to acknowledge the threat posed by inflation. The Consumer Price Index (CPI) rose 0.4% in November, buoyed by a 4.1% increase in energy prices, the Labor Department said. That made for the fourth-straight rise in the energy index and the biggest increase since August. Core prices, which exclude food and energy, remained unchanged after a 0.2% increase in October. Core CPI had risen for 10 straight months until last month.
Meanwhile, the Producer Price Index (PPI) jumped 1.8% in November, racing ahead of analysts' estimates.
"The policy that's in place was put there when we were in a deep, sharp recession and afraid of something much worse," Alan Levenson, chief economist at T. Rowe Price Group Inc. (Nasdaq: TROW), told The Washington Post. "As the economic environment improves, that stance becomes inappropriate, and may carry risks of its own."
Wall Street trailed down following the Fed announcement with the Dow Jones Industrial Average falling 10.88 points, or 0.1%, to close at 10,441.12. The Standard & Poor's 500 Index stayed in the green, however, edging up 1.25 points, or 0.11%, to close at 1,109.18.
News and Related Story Links:
- Federal Open Market Committee:
FOMC Statement
- The Washington Post:
Upswing poses questions for Fed - Money Morning:
Low November Job Losses Shock, but The Jobless Recovery Continues - Money Morning:
U.S. Consumers Feeling More Confident, Increase Retail Spending