Fed
makes new rate pledge, pumps cash into US economy
In
an unprecedented step, the Federal Reserve said it would hold
interest rates near zero until it hit the specific target of a 6.5
per cent US jobless rate, and it pledged to keep pumping more money
into the economy.
SMH,
26
April, 2012
The
central bank said its commitment to hold rates steady until its new
threshold was reached would hold as long as inflation was projected
to be no more than 2.5 per cent one or two years ahead and inflation
expectations were contained.
The
decision, accompanied by an announcement to replace a more-modest and
expiring stimulus program with a fresh round of Treasury debt
purchases, came as a surprise. Most economists had not expected the
central bank to adopt thresholds to guide policy until sometime next
year.
"The
committee remains concerned that, without sufficient policy
accommodation, economic growth might not be strong enough to generate
sustained improvement in labor market conditions," the Fed's
policy-setting panel said in a statement.
Fed
officials committed to monthly purchases of $US45 billion in
Treasuries on top of the $US40 billion per month in mortgage-backed
bonds they started buying in September, as financial markets had
expected.
Under
the "Operation Twist" program that will expire at the end
of the month, the Fed was buying $US45 billion in longer-term
Treasuries with proceeds from the sale of short-term debt. The new
round of government bond-buying it announced on Wednesday will be
funded by essentially creating new money, further expanding the Fed's
$US2.8 trillion balance sheet.
Fed
policymakers voted 11-1 to back the new plan. Richmond Federal
Reserve Bank President Jeffrey Lacker dissented, as he has at every
meeting this year, expressing opposition both to the bond buying and
the new economic thresholds.
Stocks
added to earlier gains and long-term government bond prices fell on
the Fed's announcement. Fed Chairman Ben Bernanke will discuss the
central bank's latest decision at a news conference at 2:15 p.m.
(1915 GMT).
"They
see an anemic economy, and they're doing all they can to get any
economic progress," said Alan Lancz, president of Alan B. Lancz
& Associates in Toledo, Ohio.
In
its statement, the Fed noted unemployment remains elevated and that
inflation is running somewhat below the central bank's 2 per cent
objective.
Policymakers
repeated a pledge to keep buying bonds until the labor market outlook
improved substantially, although they said their long-term asset
purchase program would end well before they raise rates.
A
drop in the jobless rate to 7.7 per cent in November from 7.9 per
cent in October was driven by workers exiting the labor force, and
therefore did not come close to satisfying that condition.
Sweating
a weak recovery
The
Fed cut overnight rates to near zero in December 2008 and has bought
about $US2.4 trillion in bonds in a further effort to push borrowing
costs lower and spur a stronger recovery.
Despite
the unconventional and aggressive efforts, US economic growth remains
tepid. GDP grew at a 2.7 per cent annual rate in the third quarter,
but it now appears to be slowing sharply. According to a Reuters poll
published on Wednesday, economists expect the economy to expand at
just a 1.2 per cent pace in the current quarter.
Businesses
have hunkered down, fearful of a tightening of fiscal policy as
politicians in Washington wrangle over ways to avoid a $US600 billion
mix of spending reductions and expiring tax cuts set to take hold at
the start of 2013.
Bernanke
has warned that running over this "fiscal cliff" would lead
the economy into a new recession.
By
setting thresholds to guide its decision on when to eventually hike
rates, the Fed was able to jettison a previous prediction that
borrowing costs would remain at rock bottom levels until at least
mid-2015.
Officials
were uncomfortable giving guidance on monetary policy based on a
calendar date, and are hopeful the new framework will help financial
markets assess incoming economic data in a way that helps them
correctly gauge the likely future stance of policy.
The
prior policy of fixing an end point was criticized by some economists
as sending a message that the Fed expected the economy to be weak
until then.
In
economic projections released in September, the Fed suggested the
jobless rate would not fall to 6.5 per cent until late-2015.
Fed
officials will release a new set of economic and interest rate
projections at 2 p.m. (1900 GMT) that could show yet another round of
downward revisions to growth prospects.
Back
in September, the Fed predicted the US economy would expand 2.5 per
cent to 3 per cent in 2013, but even that modest rate is looking
potentially rosy. The Reuters poll showed a median US growth estimate
of 2.1 per cent for next year on the same fourth quarter over fourth
quarter basis.
U.S. Rakes Up Nearly $300 Billion Deficit In First Two Months Of Fiscal 2013
12
December, 2012
To
paraphrase Tim Geinter: "Risk of the Fed ever ending its
monetization? No
risk of that."
Why? Because as the FMS just reported, the February budget deficit
was $172 billion, up $52 billion from a month ago, and $35 billion
from a year ago. In brief: in the first two months of Fiscal
2013, the
US accumulated a $292 billion budget deficit (compared
to $236 billion a year ago), a number which is simply scary when
annualized. What does this mean? That as long as the Treasury runs
$1+ trillion budget deficit, the Fed will never, ever be allowed to
stop monetizing, especially with China and the other legacy foreign
borrowers just saying nein.
Which in turn means that it will now be in the Fed's favor to paint
the economy with uglier colors (recall that the Fed now needs
unemployment deterioration to have infinite free monetization reign).
Does this mean that going over the Cliff is now an absolute
certainty.
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