- RISMedia - http://rismedia.com -
Fed Holds Course on Bond Purchases, Interest Rates
Posted By susanne On December 15, 2010 @ 4:15 PM In Foreclosure Process,Mortgage Rates,Real Estate,Real Estate Information,Real Estate News,Real Estate Trends,REO Properties,Today's Marketplace | Comments Disabled
RISMEDIA, December 16, 2010—(MCT)—The Federal Reserve, saying that the economic recovery was not strong enough to bring down unemployment, vowed to stick with its controversial bond-buying program to spur growth and to hold short-term interest rates at near zero for the foreseeable future.
In their last scheduled meeting of the year, Fed monetary policymakers gave a cautious assessment of the recovery even as more private economists raised their growth projections after a strong retail sales report.
With the notable exception of the November jobs report, economic data generally have been looking better in recent weeks. And with the compromise tax deal moving through Congress with its billions of dollars in new stimulus in the form of lower taxes, many analysts see the pace of economic growth accelerating next year.
With the combination of the Fed’s stimulus and the tax-cut package, the government is pulling out all the stops “to get growth,” said Charles Comiskey, head of Treasury trading at Scotia Capital in New York.
Fed Chairman Ben S. Bernanke and his colleagues at the central bank made no reference to the prospects of more fiscal stimulus from Congress. And although they gave a nod to the improved consumer spending of late—saying it was increasing at a “moderate pace” as opposed to “gradually” after their last meeting in November—policymakers made it clear they remained concerned about the high unemployment rate, which rose to 9.8% last month amid unexpectedly weak hiring. “Employers remain reluctant to add to payrolls,” the Fed repeated in its statement.
In addition, the housing market is still depressed, officials said, and the underlying inflation rate continues to trend downward, well below the Fed’s informal target of 1.5-2%. In short, progress in meeting the central bank’s dual mandate—fostering maximum employment and price stability—”has been disappointingly slow,” the Fed said again.
The statement did not contain any surprises. Nor did it acknowledge that Treasury bond yields have jumped over the past two months as economic data have improved—and despite the central bank’s ramped-up bond purchases.
The jump in yields “is the bond market saying, ‘You’re going to get growth,’” Comiskey said.
The Fed, at its Nov. 3 meeting, committed to buying $600 billion of Treasury securities through mid-2011, adding to purchases it was already making using proceeds of maturing mortgage bonds that it owns.
The central bank’s goal with its “quantitative easing” program is to pump more money into the financial system and restrain longer-term interest rates, such as for mortgages and corporate bonds.
But the Fed cannot directly control those rates, and Treasury bond yields have surged since mid-October, pushed up in part by better-than-expected economic data.
Treasury yields continued to climb after the Fed’s statement. They were boosted by government data showing that November retail sales rose more than expected, adding to the sense that the economic recovery is gaining steam.
The 10-year Treasury note yield jumped to 3.45%, up from 3.28%, reaching its highest level since May. The yield has rocketed from 2.39% in early October. Other interest rates, including mortgage rates, have also risen sharply.
Although the surge in rates would seem to be frustrating the Fed, bond traders say that without the central bank’s regular purchases of Treasuries, yields would be significantly higher. If that’s true, then the Fed’s program is working to some extent.
Critics say the Fed’s monetary stimulus program is unnecessary and risks stoking troubling inflation down the road. But Bernanke has been undaunted, arguing that the central bank can’t sit on its hands with unemployment near 10%.
“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate, somewhere in the vicinity of, say, five or six percent,” Bernanke said in an interview with CBS’s “60 Minutes” broadcast earlier this month.
Although some analysts think the Fed could pull back its Treasury purchases before the completion date, the statement gave no hint of that, although it repeated the oft-used language that officials would review and adjust the program as needed based on incoming data.
The statement also said policymakers would keep the short-term rates that it controls—the federal funds rate—between 0-0.25% for “an extended period.” That overnight bank-lending rate has now been at rock bottom for the past two years, and some analysts don’t see the Fed reversing course until 2012.
The policy actions were supported by all of its voting members except for Thomas M. Hoenig, president of the Kansas City Fed, who has been the lone dissenter all year. Hoenig cited the “improving economy,” adding it to his previously stated concerns that an overly easy monetary policy would increase the risk of creating imbalances and long-term inflation expectations that could destabilize the economy.
Hoenig steps out of the voting rotation next year, but Bernanke could face more dissent in 2011. Three of the four district Fed bank presidents who will join the eight permanent voting members on the committee next year are considered to be more aggressive in their attitude toward inflation.
(c) 2010, Tribune Co.
Distributed by McClatchy-Tribune Information Services.
Article printed from RISMedia: http://rismedia.com
URL to article: http://rismedia.com/2010-12-15/fed-holds-course-on-bond-purchases-interest-rates/
Copyright © 2012 RISMedia. All rights reserved.