The Federal Reserve said the economy is still growing modestly and unemployment remains elevated as it maintains $40 billion in monthly purchases of mortgage-backed securities aimed at spurring the three-year expansion.
Fed Chairman Ben S. Bernanke is leading a third round of unprecedented bond-buying as he seeks to speed job creation for 12.1 million unemployed Americans. The FOMC, in its last scheduled meeting before the presidential election, repeated today that it would press on with the asset purchases until the labor market improves “substantially.”
“Strains in global financial markets continue to pose significant downside risks,” the statement said. “Inflation recently picked up somewhat, reflecting higher energy prices.” It said longer-term inflation expectations have remained stable.
Treasuries were little changed after the statement, with the 10-year note yield rising one basis point, or 0.01 percentage point, to 1.77 percent as of 2:53 p.m. The Standard & Poor’s 500 Index fell less than 0.1 percent to 1,412.85 in New York after rising as much as 0.5 percent.
“The policy is to stay the course, remain as easy as they have been in the past,” while acknowledging “significant risks,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “They are betting inflation stays low for a long enough time that additional easing will promote economic growth and get unemployment down.”
The Fed left unchanged its statement that highly accommodative monetary policy will be appropriate “for a considerable time after the economic recovery strengthens” and repeated that interest rates are likely to stay near zero “at least through mid-2015.”
The Fed said it will continue swapping about $45 billion each month of short-term debt with longer-term securities through December to lengthen the average maturity of its holdings, a program dubbed Operation Twist.
The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities and said it may deploy other “policy tools” as necessary to ensure the labor market improves.
Richmond Fed President Jeffrey Lacker dissented for the seventh consecutive meeting, saying he opposed additional asset purchases. He dissented from the FOMC’s June decision to extend Operation Twist through the end of the year along with additional asset purchases under QE3, saying more bond buying probably won’t quicken economic growth.
Economic reports since the Fed’s last announcement in September have shown that the unemployment rate dropped unexpectedly to 7.8 percent that month, the lowest since January 2009, while retail sales and consumer confidence picked up.
Still, Bernanke said in a Sept. 13 press conference after announcing QE3 that Fed officials would be looking for labor- market improvement that persists over a sustained period.
“It’s not just a one-month or two-month phenomenon,” Bernanke said. “We’re not going to be looking for little wiggles in the numbers that are going to cause us to radically shift our policy.”
None of the respondents in a Bloomberg survey of 60 economists expected the Fed to wind down QE3 at this meeting or the meeting in December, and most predicted the purchases will last at least one year or longer.
A report in two days from the Commerce Department may show that the pace of economic growth accelerated to 1.9 percent in the third quarter from 1.3 percent in the previous three-month period, according to a Bloomberg News survey of economists.
“We’re seeing things get a little bit better and that’s certainly welcome and that’s the direction they want things to go in, but they’ve told us they’re going to err on the side of letting that momentum really take hold before they even consider stepping back,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York and a former Fed economist.
A Labor Department report on Nov. 2 is forecast to show that unemployment rose to 7.9 percent and employers added 120,000 workers to payrolls in October, scant improvement from the prior month’s 114,000 pace that was the slowest in three months.
Housing has been a bright spot as mortgage rates driven to record lows by the Fed’s asset buying spur demand.
Purchases of new homes rose in September to the highest level in more than two years, figures from the Commerce Department showed today.
Sales climbed 5.7 percent to a 389,000 annual pace, the most since April 2010, following a revised 368,000 rate in August. The median estimate of 75 economists surveyed by Bloomberg called for sales to rise to 385,000.
A report last week showed that housing starts jumped 15 percent in September to the highest level in four years. Also, the National Association of Home Builders/Wells Fargo builder sentiment index increased to the highest level since 2006.
At the same time, exports and business investment are cooling as global demand slows and companies hold back in the face of the so-called fiscal cliff, the $607 billion of tax increases and spending cuts due to take effect early next year unless Congress acts.
Economic output would shrink by 0.5 percent next year, and joblessness climb to about 9 percent if the fiscal cliff isn’t averted, according to the Congressional Budget Office. The Fed’s next meeting, on Dec. 11-12, will take place in between the presidential election and before the onset of the cliff.
The economy has been at the heart of the campaign for the White House between President Barack Obama and former Massachusetts governor Mitt Romney, with both arguing they will best be able to steer the $15.6 trillion economy. Romney has said he would replace Bernanke at the end of his term in January 2014.
The race is close nationally, with the most recent polls from the Washington Post/ABC News, the Wall Street Journal/NBC News and CBS News all showing the candidates tied or separated by a difference that’s within the margin of error.
The Standard & Poor’s 500 Index rose to a 2012 high on Sept. 14, the day after the Fed announced QE3. Since then the benchmark has dropped 3.6 percent through yesterday as companies including DuPont Co. and 3M Co. reported earnings that spurred concern the economy is weakening.
The yield on the 10-year Treasury note rose to 1.77 percent yesterday, near its 1.76 percent closing level on the day before the last FOMC meeting. The yield fell to a record low 1.38 percent in July.
DuPont, the most valuable U.S. chemical maker, said yesterday it will eliminate 1,500 jobs after posting a smaller- than-estimated third-quarter profit, while 3M, the manufacturer of products including Scotch tape and dental braces, reduced its full-year forecast as a recession in Europe and slowing Asia growth crimped sales.
Demand for U.S. durable goods other than transportation equipment unexpectedly dropped in August for a third consecutive month, signaling that slowdowns in business investment and exports have curbed growth.
Orders for goods meant to last at least three years, excluding airplanes and automobiles, fell 1.6 percent in August, the Commerce Department said last month. U.S. manufacturing expanded in September after three months of contraction, according to the Institute for Supply Management.
The sluggish recovery has hurt Chipotle Mexican Grill Inc., which plunged last week after third-quarter profit trailed analysts’ estimates on slowing sales growth. The Denver-based burrito chain tumbled 15 percent on Oct. 19 to a 19-month closing low of $243.
“We still don’t think the economy is in great shape,” Co- Chief Executive Officer Montgomery Moran said during a conference call with analysts after the Oct. 18 earnings report. “Consumers seem to be a little bit cautious.”
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