Fed sees the light, but no retreat yet
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Bloomberg
Oluşturulma Tarihi: Haziran 26, 2009 00:00
WASHINGTON - Ending a crucial meeting, US Federal Reserve officials vote to maintain the size and pace of their $1.75 trillion program to buy mortgage debt and Treasuries. The Fed statement says the economic downturn is easing, but hints that expansionary policy will continue for a while.
U.S. Federal Reserve officials, encouraged by signs the recession is easing, doused speculation they will pump more money into the economy to hold down interest rates, while indicating they’re not ready to begin a retreat.
Fed policy makers voted Wednesday to maintain the size and pace of their $1.75 trillion program to buy mortgage debt and Treasuries. The central bank said it sees a "gradual resumption of sustainable" growth even as "substantial" economic slack holds down inflation pressures.
The statement indicated policy makers need more time to assess the prospects for a recovery starting in the second half of the year before deciding to embark on any exit from their unprecedented credit programs. Complicating their task is an increase in Treasury yields, which yesterday’s message failed to stem: 10-year rates rose the most in almost a week.
"The Fed is reminding the hyperventilating bond market that it needs to relax," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "Inflation will be low for some time because the economic weakness will be with us for a time. They are not about to start to thinking about an exit strategy."
The lack of any shift in the statement puts focus on Chairman Ben S. Bernanke’s semiannual testimony on monetary policy to Congress July 21. The Fed on Wednesday refrained from specifying when it will wind down its emergency-loan programs, saying just that it will alter them "as warranted."
"We are still a long way from scaling back the balance sheet," said Dean Maki, chief U.S. economist at Barclays Capital in New York. "The balance sheet is still growing based on previously announced programs," he said, adding that "if financial conditions continue to improve and the economy is recovering solidly, we would expect the Treasury program to expire" as scheduled in September.
The vote by the Federal Open Market Committee, led by Bernanke, was unanimous. The central bank kept plans to buy as much as $1.25 trillion of mortgage-backed securities and $200 billion of federal agency debt by the end of the year, and $300 billion of Treasury securities "by autumn."
Before the meeting, some investors and economists speculated that the Fed would increase purchases after Treasury and mortgage rates increased in recent weeks, or would extend government-debt purchases through year-end.
Altering the language
Instead, in the biggest change to the statement, central bankers opted to alter language in the statement about inflation. "The prices of energy and other commodities have risen of late," the Fed said. "However, substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time." "They’ve now decided that asset purchases run the risk of upsetting markets and making markets worry about long-term inflation risks," said Jan Hatzius, chief U.S. economist at Goldman Sachs Group in New York. "There may be some benefit, but the benefit is pretty small, and the costs, if it does upset the markets, could be very large."
Fed officials "still have $120 billion or so to go in terms of the purchasing authority" for Treasuries, said John Ryding, founder and chief economist at RDQ Economics in New York.
The Fed refrained from hinting when and how it would begin to withdraw the expansion of credit under which its assets ballooned to $2.1 trillion. While investor optimism about the economy may be contributing to higher yields, it’s possible there are worries about the record budget deficit, San Francisco Fed President Janet Yellen said this month. Bernanke told Congress June 3 the Fed "will not monetize" U.S. debt, addressing concern that the central bank’s purchases of Treasuries might be used to finance deficit spending.
The lack of a mention of a retreat doesn’t mean officials aren’t thinking about it. Bernanke may discuss the issue at the House Financial Services Committee hearing next month. James Bullard, president of the St. Louis Fed, will speak on the topic June 30.
"The real bind for the FOMC is the amount of Treasury debt coming at the markets," said Lee Hoskins, former head of the Cleveland Fed bank. Expanding Fed purchases may fan investor concerns about inflation, or rates may rise, anyway, because of an increased supply of government debt, Hoskins said. "Congress needs to address the deficit issue if it wants to improve prospects for the economy."
Fed policy makers voted Wednesday to maintain the size and pace of their $1.75 trillion program to buy mortgage debt and Treasuries. The central bank said it sees a "gradual resumption of sustainable" growth even as "substantial" economic slack holds down inflation pressures.
The statement indicated policy makers need more time to assess the prospects for a recovery starting in the second half of the year before deciding to embark on any exit from their unprecedented credit programs. Complicating their task is an increase in Treasury yields, which yesterday’s message failed to stem: 10-year rates rose the most in almost a week.
"The Fed is reminding the hyperventilating bond market that it needs to relax," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "Inflation will be low for some time because the economic weakness will be with us for a time. They are not about to start to thinking about an exit strategy."
The lack of any shift in the statement puts focus on Chairman Ben S. Bernanke’s semiannual testimony on monetary policy to Congress July 21. The Fed on Wednesday refrained from specifying when it will wind down its emergency-loan programs, saying just that it will alter them "as warranted."
"We are still a long way from scaling back the balance sheet," said Dean Maki, chief U.S. economist at Barclays Capital in New York. "The balance sheet is still growing based on previously announced programs," he said, adding that "if financial conditions continue to improve and the economy is recovering solidly, we would expect the Treasury program to expire" as scheduled in September.
The vote by the Federal Open Market Committee, led by Bernanke, was unanimous. The central bank kept plans to buy as much as $1.25 trillion of mortgage-backed securities and $200 billion of federal agency debt by the end of the year, and $300 billion of Treasury securities "by autumn."
Before the meeting, some investors and economists speculated that the Fed would increase purchases after Treasury and mortgage rates increased in recent weeks, or would extend government-debt purchases through year-end.
Altering the language
Instead, in the biggest change to the statement, central bankers opted to alter language in the statement about inflation. "The prices of energy and other commodities have risen of late," the Fed said. "However, substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time." "They’ve now decided that asset purchases run the risk of upsetting markets and making markets worry about long-term inflation risks," said Jan Hatzius, chief U.S. economist at Goldman Sachs Group in New York. "There may be some benefit, but the benefit is pretty small, and the costs, if it does upset the markets, could be very large."
Fed officials "still have $120 billion or so to go in terms of the purchasing authority" for Treasuries, said John Ryding, founder and chief economist at RDQ Economics in New York.
The Fed refrained from hinting when and how it would begin to withdraw the expansion of credit under which its assets ballooned to $2.1 trillion. While investor optimism about the economy may be contributing to higher yields, it’s possible there are worries about the record budget deficit, San Francisco Fed President Janet Yellen said this month. Bernanke told Congress June 3 the Fed "will not monetize" U.S. debt, addressing concern that the central bank’s purchases of Treasuries might be used to finance deficit spending.
The lack of a mention of a retreat doesn’t mean officials aren’t thinking about it. Bernanke may discuss the issue at the House Financial Services Committee hearing next month. James Bullard, president of the St. Louis Fed, will speak on the topic June 30.
"The real bind for the FOMC is the amount of Treasury debt coming at the markets," said Lee Hoskins, former head of the Cleveland Fed bank. Expanding Fed purchases may fan investor concerns about inflation, or rates may rise, anyway, because of an increased supply of government debt, Hoskins said. "Congress needs to address the deficit issue if it wants to improve prospects for the economy."