Fed holds fire on stimulus but keeps its options open
THE Federal Reserve last night announced no new steps to speed the plodding economic recovery, but reaffirmed a policy shift first detailed in August and left open the possibility that it could start buying government debt if unemployment does not improve.
The Fed will continue to use money from its holdings of mortgage-related bonds to buy long-term Treasury debt, the tactic it announced on August 10. That strategy was intended to prevent a slight tightening of monetary policy that would have occurred as the bonds held by the Fed were paid off and money was taken out of the economy.
However, the Fed did make one important shift in its outlook, stating that inflation levels were at "levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability".
That statement clearly signaled the Fed's belief that inflation was too low and that further action might be forthcoming soon. But the central bank, led by its chairman, Ben S Bernanke, put off a pivotal decision on whether to begin a big new push to stimulate the economy by creating money and buying large-scale purchases of Treasury securities, a strategy known as quantitative easing. The Fed engaged in a big round of quantitative easing in 2009-10 by purchasing $1.4trn (€1.05trn) in mortgage-related securities and another $300bn in Treasury debt. The actions helped lower long-term interest rates, which helps to stimulate the economy by lowering the cost of borrowing.
While the Fed tries to operate outside of political cycles, the fact that this was the last scheduled policy meeting before the mid-term elections cannot have escaped its members' notice. The committee is next scheduled to gather for a two-day meeting on November 2 -- election day -- and November 3.
"All else equal, if they postpone action until after the mid-term election, they would prefer to do that," said Jonathan H Wright, an economics professor and a former Fed researcher.
A growing consensus among Wall Street economists is that the Fed will probably resume quantitative easing later this year, either at the November meeting or at the committee's final meeting of 2010 on December 14. (Bloomberg)