Federal Reserve

Fed Sticks to Policy Initiatives as Economic Growth Remains Constrained

Posted on Monday, January 31, 2011

The Federal Reserve board held its first meeting of 2011 this week. It may be a new year with new faces around the Fed’s boardroom table, but there’s nothing new in the central bank’s policy direction or its guarded assessment of the nation’s economic recovery.
Board members voted to keep the Fed’s benchmark interest rate near zero – a level they’ve clung to for over two years now – and press forward with their November decision to pump another $600 billion into the economy.
The central bank will maintain the target range for the federal funds rate at 0 to 0.25 percent and “continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period,” according to the Fed’s policy statement released Wednesday afternoon.
The board decided to continue expanding the Federal Reserve’s securities holdings in order to promote a stronger pace of economic recovery and to help ensure inflation levels remain stable, officials said. The central bank will maintain its existing policy of reinvesting principal payments from its portfolio of mortgage-backed securities
and government housing debt and intends to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
Commenting on the planned bond-buying spree, Paul Ashworth, chief U.S. economist for the research firm Capital Economics, said, “We expect the Fed to finish its remaining asset purchases as scheduled, but it is unlikely to extend the program immediately. Nevertheless, if economic growth slows towards the end of this year, as the fiscal stimulus begins to fade, the Fed might still be persuaded to restart quantitative easing then.”
Fed officials remained cautious in their remarks on the economic recovery. They said progress “is continuing,” but noted that the pace “has been insufficient to bring about a significant improvement in labor market conditions.”
According to the board, growth in household spending picked up late last year, but remains constrained by high unemployment, lower housing wealth, and tight credit. Among the laundry list of areas of concern is the fact that “the housing sector continues to be depressed, while investment in nonresidential structures is still weak, [and] employers remain reluctant to add to payrolls.”
There was one distinctive difference to the Fed’s latest meeting – the vote was unanimous in favor of the policy decision for the first time in 12 months.
Kansas City Fed Chief Thomas Hoenig had been the lone voice of dissension for the past year, casting his ballot against holding the federal funds rate so low on the grounds that with the economy showing some signs of improvement, a continuation could increase the risk of financial imbalances and destabilization. Hoenig vacated his seat on the board at the start of the year as part of the Fed’s regular annual rotation of regional bank presidents.
By: Carrie Bay, DS NEWS

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