Fed Open to Expanding QE as It Counters Talk of Tapering
Facing the risk of a fourth straight summertime slowdown, Federal Reserve officials raised the prospect of increasing the monthly pace of bond buying above $85 billion to guard against any slump in growth or employment.
The Fed’s statement yesterday that it’s “prepared to increase or reduce the pace of its purchases” was a signal that its $3.32 trillion balance sheet is a flexible tool for monetary policy that can be adjusted up or down, like interest rates. The statement, released in Washington, countered discussion of the timing of a reduction in purchases at the Fed’s March meeting.
“There is more uncertainty so they probably wanted to correct a single-minded focus on tapering,” said Roberto Perli, a partner at Cornerstone Macro LP, a research firm in Washington, and former member of the Fed board’s Division of Monetary Affairs. At the same time, policy makers need to see more data before deciding whether to step up the pace of asset purchases, Perli said.
Stocks and Treasury yields declined yesterday after reports showed that U.S. manufacturing in April expanded at the slowest pace this year and companies took on the fewest workers in seven months. The reports added to evidence that the world’s largest economy is slowing this quarter after picking up speed in the first three months of the year.
The Standard & Poor’s 500 Index (SPX) advanced 0.4 percent to 1,588.50 as of 9:58 a.m. in New York, near the benchmark gauge’s record close on April 30. The yield on the 10-year Treasury note increased 0.01 percentage point to 1.64 percent from yesterday’s 1.63 percent, a record low for the year.
The Federal Open Market Committee said it will keep for now the monthly pace of bond purchases at $85 billion, a strategy aimed at spurring a revival in sales of cars and homes by reducing mortgage rates and other long-term borrowing costs.
The Fed repeated that bond buying will continue “until the outlook for the labor market has improved substantially.” It also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
The shift in the statement’s language endorsed Chairman Ben S. Bernanke’s message in March that the committee “could vary the pace of purchases” as the Fed gets closer or further away from its goals.
The statement is “slightly more accommodative on the margin, which is consistent with the economic data since the last meeting,” said Chris Molumphy, who helps oversee $823.7 billion as chief investment officer for fixed income at Franklin Templeton Investments in San Mateo, California.
“By even referencing the possibility of an increase in the pace of purchases, it signifies that a less accommodative stance is not automatically in the cards,” Molumphy said.
During the past three years, the Fed planned to cut accommodation early in the year, only to boost it after economic growth lagged behind its forecasts.
“The Fed is still gun-shy at this point” because of previous slowdowns, said Drew Matus, an economist at UBS Securities LLC in Stamford, Connecticut, who formerly worked at the New York Fed. “Even if this is temporary it probably has distorted their view enough that it would prevent them from really moving materially in any direction for a bit.”
Payrolls in March expanded by 88,000, slowing from a gain of 268,000 the prior month. A Labor Department report tomorrow will probably show an increase of 145,000 in April, while the jobless rate stayed at 7.6 percent, according to the median forecast of a Bloomberg survey of economists.
The pace of hiring also faltered in the spring and summer of the past two years. Payrolls grew by 87,000 in June 2012, the lowest level of that year. In July of 2011, the economy added just 78,000 jobs, following a gain of 209,000 the month before. Gains in non-farm payrolls have averaged about 100,000 a month since the recession ended in June 2009.
The jobless rate is about two percentage points above a level Fed officials would define as full use of labor resources, with nearly 40 percent of the jobless having been without work for 27 weeks or more.
“What is driving policy is the employment situation and the general economic growth trend,” said Jay Mueller, a senior portfolio manager at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “There is no doubt in my mind that if the economy did slow down -- if we slip below 2 percent growth or if we stop making progress on employment -- they are going to try and do something.”
The economy is showing signs of slowing as the payroll-tax increase in January starts to pinch consumers and concern over the automatic cuts in planned federal spending reins in business investment and hiring.
“Fiscal policy is restraining growth,” according to yesterday’s FOMC statement, an explicit signal that central bankers are getting no help from the U.S. lawmakers toward achieving their Congressionally mandated goals of maximum employment and stable prices.
Household purchases rose 0.2 percent in March after jumping 0.7 percent the prior month, ending the first quarter with the smallest advance so far this year, according to figures from the Commerce Department.
Demand for durable goods slumped by 5.7 percent in March, the biggest decline in seven months, the agency has also said. A report yesterday from the Institute for Supply Management showed manufacturing expanded at the slowest pace of the year in April.
The Fed statement avoided calling out any alarms on inflation, which is moving further away from the central bank’s target. The committee repeated that it “anticipates that inflation over the medium term likely will run at or below its 2 percent objective.”
Consumer prices rose 1 percent from a year earlier in March, as measured by the personal consumption expenditures price index, down from a gain of 1.3 percent in February.
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