Bernanke Dissatisfied With Growth Will Press on With QE PaceJoshua Zumbrun and Jeff Kearns
Federal Reserve Chairman Ben S. Bernanke signaled he isn’t close to easing up on $85 billion in monthly bond purchases to spur a stalled economy and bring down 7.8 percent unemployment.
The Federal Open Market Committee said in a statement yesterday that growth, while slowed by “transitory factors,” faces “downside risks” even after strains in global financial markets have eased. The expansion will pick up and unemployment will fall in response to “appropriate policy accommodation,” Fed officials said in a statement after a two-day meeting.
“Everything in this statement suggests that they will continue to buy $85 billion per month and that we still have a ways to go before they’re satisfied that the labor market is where they want it to be,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York and a former Richmond Fed economist.
Bernanke and his FOMC colleagues are deploying record stimulus through an open-ended expansion of the Fed balance sheet after determining that the benefits from stoking a flagging economy outweigh any risk of financial instability or higher inflation.
U.S. stocks were little changed, after the best start to a year for the Standard & Poor’s 500 Index since 1989. The S&P 500 fell less than 0.1 percent to 1,501.29 at 10:46 a.m. in New York. The 10-year Treasury note yielded 1.99 percent, unchanged from late yesterday.
Minutes from the FOMC’s December meeting showed that policy makers debated when to end the monthly purchases of $45 billion in Treasuries and $40 billion in mortgage bonds. The central bank has pledged to continue the buying until the labor market improves “substantially.”
Policy makers who provided forecasts last month were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who favored a later date, the minutes said.
The tone of yesterday’s statement suggests “markets overreacted to the December minutes,” overestimating the FOMC’s inclination to curb asset purchases, said Joseph Gagnon, a former associate director of the Fed’s Division of International Finance.
After release of the Dec. 11-12 meeting minutes on Jan. 3, the yield on the 10-year Treasury note rose 0.07 percentage point, to 1.91 percent. The S&P 500 fell 0.2 percent, reversing a 0.2 percent gain earlier in the day.
Gagnon, a senior fellow at the Peterson Institute International Economics in Washington, predicts the Fed will continue buying bonds through the end of this year.
“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the FOMC said yesterday hours after the Commerce Department said gross domestic product shrank at an annual rate of 0.1 percent during the fourth quarter.
The Fed believes growth will resume in 2013, said Ellen Zentner, a senior economist at Nomura Holdings Inc. in New York.
“That’s what they want to stress, that when they look into their crystal ball for GDP that the pause isn’t going to carry forward,” she said.
The buying has already propelled the central bank’s balance sheet above a record $3 trillion and shows Bernanke’s resolve to further boost an economy where 12.2 million Americans remain unemployed more than three years after recovery officially began.
Kansas City Fed President Esther George dissented from yesterday’s statement, saying she was concerned that “the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”
Fed presidents rotate voting on monetary policy, with George, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Boston’s Eric Rosengren joining the committee as voters for 2013.
The FOMC said asset purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The Fed will continue reinvesting any Treasury securities that mature and will reinvest its portfolio of maturing housing debt into agency mortgage-backed securities.
The Fed 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 inflation remains no more than 2.5 percent.
Central bankers will have more information on the outlook for the job market tomorrow, when the Labor Department releases its 8:30 a.m. report covering the month of January.
Economists in a Bloomberg survey expect the unemployment rate will remain unchanged at 7.8 percent. Employers will add 165,000 jobs, which would be the most since August, according to the survey’s median estimate.
“In the United States, we’re becoming increasingly optimistic,” Michael DeWalt, the director of investor relations for Peoria, Illinois-based Caterpillar Inc., said on a Jan. 28 conference call with analysts. “The Fed’s interest-rate policies and their plan to continue injecting liquidity are in our view positive for 2013 growth.”