Wednesday, May 1, 2013

Federal Reserve maintains QE, may raise or cut amount

    The Federal Reserve, the U.S. central bank, maintained its goal of buying long-term Treasury bonds and housing-related debt worth $85 billion a month along with its target for the federal funds rate at 0-0.25 percent, as expected, saying it "continues to see downside risks to the economic outlook."
    While the Federal Reserve's policy-making body, the Federal Open Market Committee (FOMC) largely repeated its statement from March, it added today that it may either increase or decrease the amount of bonds it will be purchasing, depending of the state of the U.S. jobs market and inflation.
    "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," the FOMC said, adding a new sentence to its previous statements.
   However, the FOMC also repeated that it plans to continue its purchases of bonds to maintain downward pressure on interest rates and support the home mortgage market "until the outlook for the labor market has improved substantially in a context of price stability."
    With the U.S. unemployment rate gradually declining - it fell to 7.6 percent in March from February's 7.7 percent - members of the FOMC have been discussing when to reduce the monthly purchases of bonds as the risks of continued massive injections of liquidity into the economy - known as Quantitative Easing - start growing.
    More recently, however, a decline in inflation - headline U.S. inflation fell to 1.5 percent in March, below the Fed's 2.0 percent target - and a sluggish economy has raised the question of whether the Federal Reserve should in fact increase the size of its quantitative easing to ensure that the economy grows during a time of fiscal tightening.
    In the first quarter of this year, the U.S. economy bounced back from a weak fourth quarter of 2012 with Gross Domestic Product growing by 2.5 percent. On an annual basis, GDP grew by 1.8 percent, up from the fourth quarter's pace of 1.7 percent, but there have been clear signs that the economy has been slowing down in the second quarter, mainly due to lower government spending.
    Confirming its view from March, the Federal Reserve said economic activity had been expanding at "a moderate pace" and the labor market has improved but the "unemployment rate remains elevated."
    While household spending,  business investments and the housing sector have made progress, "fiscal policy is restraining economic growth," the FOMC said.
    Although the FOMC signaled a new flexibility about the extent of quantitative easing, it confirmed that it expects to maintain its "highly accommodative stance of monetary policy" for a considerable time after the asset purchase program ends and the economic recovery strengthens.
    "In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored," the FOMC said.
    As in March, FOMC member Esther George was the only member to vote against the policy statement, saying the continued high level of monetary accommodation increases the risks of future economic and financial imbalances and could raise long-term inflation expectations.


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