Federal Reserve Continues Expansionary Policies

By December 12, 2012Economy

The Federal Open Market Committee (FOMC), in its monetary policy statement, said that the economy and labor markets continue to expand “at a moderate pace” despite Hurricane Sandy and other challenges. With that said, the Fed noted that “business investment has slowed” and “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

There remain significant headwinds from slowing global growth and the fiscal cliff to warrant concern, with “significant downside risks to the economic outlook.

Therefore, the Fed will continue its policy of purchasing $40 billion in mortgage-backed securities each month to stimulate the economy. In addition, with the expiration of the “Operation Twist” objective, it will also purchase another $45 billion in long-term securities each month. This $85 billion in purchases each month will continue to push down long-term rates, something that has already brought mortgage rates to historic lows. This has helped to prop up the housing sector and allowed many Americans to refinance their mortgages for extra disposable income.

In its press release, the Fed says that inflation remains under control for now, with core prices at or below its stated target of 2 percent. Nonetheless, it will continue to monitor pricing pressures moving forward, adjusting its stance as needed.

The other major change in this statement was that the FOMC dropped its stated policy of maintaining “exceptionally low” rates through mid-2015. In place of the date target was a stated target for unemployment and inflation. The Fed will continue its accommodative policies in place until the unemployment rate hits 6.5 percent and/or inflation reaches 2 1/2 percent. This new guidance will advise future direction, with the shift a nod to those FOMC directors who have been pushing the Fed to do more to stimulate growth.

Of course, it is a move that it is not supported by so-called inflation hawks, and the Richmond Fed’s president Jeffrey Lacker dissented much as he in past statements.

For manufacturers, this means that the Fed is committed to stimulating the economy, and it also suggests that interest rates will stay at historic lows for the foreseeable future. If there are any concerns, it would stem from the targeting, especially since the unemployment rate is not forecasted to reach 6.5 percent until probably 2014 at the soonest. Some manufacturing leaders might worry about long-run inflationary pressures, i.e., how the Fed exits from these accommodative measures. In short-run, pricing pressures remain modest and the prospect of low interest rates for the next couple years provides some degree of predictability in the marketplace.  

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM) and the Director of the Center for Manufacturing Research for The Manufacturing Institute, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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