The Federal Reserve said it’s willing to ease monetary policy further to spur growth and support prices while refraining today from expanding its holdings of securities.
“The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate,” the Federal Open Market Committee said today in a statement in Washington.
The Fed’s statement indicates that U.S. central bankers are now focused on inflation that’s below their preferred long-term range as central reason to provide additional monetary stimulus. Gold rose to a record, the dollar weakened and the yield on two-year Treasuries hit an all-time low on speculation Chairman Ben S. Bernanke will purchase additional U.S. government securities in coming months in a bid to lower long-term interest rates.
“It would take an economic miracle of revived prices and jobs in the coming months to prevent another expansion of the Fed’s balance sheet,” said Mark Spindel, founder and chief investment officer of Potomac River Capital LLC in Washington, which manages $200 million. “The triggers are unacceptably low inflation and high unemployment. These triggers have already been tripped.”
The so-called core inflation rate, which excludes volatile food and fuel costs, was 0.9 percent in August, unchanged from the month before.
The breakeven rate for 10-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, rose 6 basis point to 1.85 percentage points. The rate is a measure of the outlook for consumer prices over the life of the securities.
That compares with an average of about 2.00 percentage points since the Treasury first sold the securities in 1998. The rate had dropped as low as 1.47 percentage points on Aug. 25, the least since May 2009. Breakeven rates turned negative in November 2008.
Fed policy makers said the pace of recovery and job growth have “slowed in recent months.” The committee also said “measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”
The FOMC retained its stance from last month of keeping its portfolio of securities stable at around $2 trillion to keep money from draining out of the financial system.
“Inflation is likely to remain subdued for some time before rising to levels the committee considers consistent with its mandate,” the statement said.
A gauge of inflation watched by Fed officials, the personal consumption expenditures price index, minus food and energy, rose 1.4 percent for the year ending July. The FOMC’s preferred long-run range for inflation is 1.7 percent to 2 percent.
“This is a Fed blatantly saying they are out of their mandate now on inflation,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in a Bloomberg Television interview. The FOMC will likely ease should inflation further subside and the unemployment rate not decline “dramatically,” she said.
The yield on the two-year Treasury note fell four basis points to 0.420 percent at 4:11 p.m. in New York. The Standard & Poor’s 500 Index fell 0.3 percent to 1,139.79 at the 4 p.m. close of trading in New York as investors bought Treasuries. Gold futures surged as much as 0.9 percent to $1,292.40 an ounce as the dollar depreciated against 15 of 16 major counterparts.
Kansas City Federal Reserve Bank President Thomas Hoenig dissented for a sixth straight time, tying a record for most consecutive dissents at regular FOMC meetings since 1955 because he “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”
U.S. central bankers are on guard against an economy that may be stuck at a pace of growth that won’t generate higher levels of employment for years to come. Fed officials in June forecast the unemployment rate would be in a range of 6.8 percent to 7.9 percent by 2012.
The National Bureau of Economic Research yesterday said the worst recession since the 1930s ended in June 2009. Unemployment in the U.S. may stay above pre-recession levels until at least 2013, the Organization for Economic Cooperation and Development said in a report the same day.
Gross domestic product expanded at a 1.6 percent annual rate in the second quarter, and St. Louis forecasting firm Macroeconomic Advisers estimates growth is tracking at a 1.4 percent annual rate for the third quarter.
Bernanke told central bankers gathered in Jackson Hole, Wyoming, on Aug. 27 that “preconditions for a pickup in growth in 2011” appear to be in place. Even so, policy makers are “prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
Bernanke said the benefits of a resumption of large-scale asset purchases must be weighed against risks that include an erosion of public confidence that the Fed will be able to reduce its balance sheet and prevent a surge in inflation.
Since Bernanke’s Jackson Hole speech, reports on retail sales, manufacturing and employment have tempered investor concerns that the economy is at risk of sliding back into a recession.
Retail sales rose in August for the second consecutive month, and the Institute for Supply Management’s factory index rose to a three-month high. Companies in the U.S. added 67,000 jobs last month, more than forecast by economists.
Even so, the pace of payroll growth is too slow to make up for the loss of more than 8 million jobs caused by the recession or spur the consumer spending that makes up more than 70 percent of the economy.
Memphis-based FedEx Corp., the second-largest U.S. package-shipping company, said last week it will eliminate 1,700 jobs as it forecast earnings for the current quarter that fell short of analysts’ estimates.
Consumer confidence fell in September to a one-year low, according to an index compiled by Thomson Reuters and the University of Michigan.
Companies have little pricing power after the recession ravaged incomes and household finances. The consumer price index, minus food and energy, rose 0.9 percent for the 12 months ending August.
To attract shoppers, companies such as Bentonville, Arkansas-based Wal-Mart Stores Inc. and Cincinnati-based Kroger Co. are discounting merchandise.
“Our customer remains challenged,” William Simon, president and chief operating officer of Wal-Mart’s U.S. operations, said at an analyst presentation Sept. 15. “We need to figure out how to operate in this environment.”
Household wealth in the U.S. fell 2.8 percent in the second quarter as share prices were depressed by the European debt crisis, according to the Fed’s Flow of Funds report on Sept. 17. The Census Bureau said last week that the number of Americans living in poverty rose to 43.6 million, the most in 51 years.
Gross domestic product will expand at an average annual pace of 2.5 percent next year, according to the median estimate in a Bloomberg survey of economists this month, down from a forecast of 2.8 percent in early August.