Fed Closes Ranks as Improving Economy Fails to Derail Asset-Purchase Plans
Federal Reserve officials closed ranks to signal that an improving economy won’t derail their plan to cut unemployment by pumping $600 billion into the financial system.
The pace of recovery is “insufficient to bring about a significant improvement in labor market conditions,” the Federal Open Market Committee said yesterday in a statement in Washington that won unanimous support for the first time in 13 months.
“They’re trying very hard in their statement to get people to stop jumping the gun” with an expectation that the record stimulus will end before the planned conclusion in June, said Ethan Harris, head of developed-markets economic research at Bank of America Merrill Lynch in New York. The Fed is saying, “we’re continuing our buying program and we’re not going to move for a long time,” he said. Harris put the odds of completing the purchases at 95 percent.
Chairman Ben S. Bernanke and his colleagues are strengthening their commitment to the asset purchases as two new members, Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher, joined the policy-setting panel. Both men, who earlier criticized the program, supported the committee in saying the easing was needed to “promote a stronger pace of economic recovery.”
Plosser and Fisher were among four regional Fed presidents who rotated into voting slots for the year at this week’s meeting. They replaced officials including the Kansas City Fed’s Thomas Hoenig, who favored tighter policy as the lone dissenter in all eight decisions last year.
‘Better for Confidence’
Stocks and commodities rose yesterday as the dollar fell. The Standard & Poor’s 500 Index gained 0.4 percent to close at 1,296.63, the highest since August 2008. The S&P GSCI Spot Index of 24 commodities rose 1.9 percent. The dollar fell 0.3 percent against a basket of six major currencies in New York trading yesterday.
The Fed left its benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and retained a pledge in place since March 2009 to keep it “exceptionally low” for an “extended period.”
“Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit,” the Fed’s statement said.
Added to Payrolls
“They’re walking the delicate line between seeing enough improvement in the economy to believe their program had a positive effect while at the same time seeing enough weakness to justify completing it,” said Bruce McCain, chief investment strategist at Cleveland-based KeyCorp’s private banking unit, which oversees $25 billion. “They’re going to be in the frying pan over this right up to the end.”
Central bank officials downplayed increases in food and fuel costs, saying that “although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”
The inflation gauge watched by the Fed, which excludes food and energy costs, showed a 0.8 percent increase in the 12 months through November. Central bank officials prefer that the inflation rate range from 1.6 percent to 2 percent. Prices of food, metals and petroleum-related products have increased, with the national average price of gasoline rising 15 percent in the past year to $3.11 a gallon.
“To ignore commodities entirely would suggest they’re oblivious, so they acknowledge the view is out there but immediately turn away with an almost disdainful tone,” McCain said.
Critics including Stanford University Professor John Taylor have said the bond purchases risk sparking too much inflation. Republican politicians including House Speaker John Boehner, as well as Chinese, German and Brazilian government officials, have said the policy may undermine the dollar.
Bernanke “has made it very clear that we would need a substantial improvement from where we are to justify a shift in policy,” she said. He “has clearly regained control of messaging, at least for now.”
The Fed has acquired $261 billion of Treasuries since it started carrying out the second round of so-called quantitative easing on Nov. 12. That includes securities bought by reinvesting proceeds from payments on the mortgage debt bought during the first round of easing, which ran from December 2008 to March 2010 and resulted in $1.7 trillion of purchases.
Stocks have rallied since Nov. 3, when the Fed announced the policy, and inflation expectations have climbed. The five- year breakeven rate between nominal and inflation-indexed bonds rose to 1.89 percent yesterday from 1.47 percent on Nov. 3.
Housing is showing some life. U.S. previously owned homes were sold in December at the quickest rate in seven months as buyers tried to lock in low mortgage rates, and new-home sales rose more than economists forecast. Housing starts and home prices haven’t shown similar gains, and in their statement yesterday, Fed officials said housing “continues to be depressed.”
Begun to Recover
“While recent data suggests that the economy has started to recover, this improvement has not yet resulted in sustained job growth or higher consumer confidence, the two necessary components of any housing recovery,” Jeffrey Mezger, chief executive officer of KB Home, the Los Angeles-based homebuilder that targets first-time buyers, said in a Jan. 7 conference call.
Retail sales rose 0.6 percent in December, capping the biggest annual increase in more than a decade. Banks’ commercial and industrial loans increased for a seventh straight week through Jan. 12, the longest sustained gain since 2008, according to Fed data, though the improvement hasn’t been enough to convince Fed officials that the job market will take off.
“Policy remains on autopilot, with no serious consideration of more or less stimulus from previous meetings,” said Jim O’Sullivan, chief economist at MF Global Ltd. in New York. “The debate in the second half of the year may be on when to start allowing some of the asset purchases to unwind.”
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