The Federal Reserve’s Federal Open Market Committee (FOMC) continued its efforts to keep long-term interest rates low, as announced in its statement issued this afternoon. In particular, the Fed will extend “Operation Twist,” which seeks to rebalance the Fed’s portfolio toward long-term – especially mortgage-backed – securities. The statement from the New York Federal Reserve Bank, which conducts trades for the Federal Reserve Board, said, “The continuation of the maturity extension program will proceed at a current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012.”

The FOMC made this action because the pace of economic growth has slowed somewhat in the past couple months. While the U.S. continues to see “modest” growth, employment growth and household spending appear to be easing. On the positive side, Americans are benefiting from lower prices due largely to lower energy costs, and the housing market continues its slow ascent upward (even as it remains depressed overall).

Some analysts felt that slower economic growth warranted another round of quantitative easing to help stimulate economic growth. The Federal Reserve has a dual mandate to “foster maximum employment and price stability.” But, it was not clear that the economy needed that, and in the end, the Fed opted to simply extend Operation Twist. Even that, though, was too much for Jeffrey Lacker, the President of the Richmond Federal Reserve Bank and a well-known “inflation hawk.” He dissented from the FOMC’s policy action, as he “opposed continuation of the maturity extension program.”

Much of the rest of the language in the Fed’s statement was similar to past iterations. For instance, the Fed will continue to strive for “exceptionally low” interest rates through late 2014. The Fed feels that inflationary pressures will remain “subdued” until then, allowing it to continue to pursue other options to stimulate growth.

Updated: While the Fed anticipates core inflation of between 1.7 and 2.0 percent this year, its latest economic projections show reduced economic growth and higher estimates for unemployment. It now expects for real GDP to grow between 1.9 and 2.4 percent in 2012, down from the 2.4 to 2.9 percent range predicted in April. In addition, the unemployment rate should be between 8.0 and 8.2 percent by year’s end, up from 7.8 to 8.0 percent.

As with past forecasts, the unemployment rate is expected to remain elevated. In 2014, it should range between 7.0 and 7.7 percent, higher than the 6.7 to 7.4 percent range seen three months ago. Real GDP should grow 2.2 to 2.8 percent in 2013 and 3.0 to 3.5 percent in 2014, according to the Fed’s latest analysis.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve Board’s Federal Open Market Committee (FOMC) maintained its existing monetary policy actions, as announced in its statement released this afternoon.  Much of the wording of this statement was similar to the last two. The only part that changed was the paragraph describing the economy:

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.

Aside from the description of an improved economy, much of the rest of the text remained the same. On the topic of inflation, the Fed feels that pricing pressures remain subdued. In particular, the release says the following:

Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

It left intact the policy – enacted at its January meeting – of “exceptionally low” levels of interest rates through late 2014. Because of this action, Jeffrey Lacker, the President of the Richmond Federal Reserve Bank, dissented once again. All of the other FOMC members voted in favor. 

The Fed will also maintain its plan to continue rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities. The intent of this policy is to push interest rates – particularly those impacting mortgages – lower.

Overall, it was widely anticipated that the Fed would make no new moves at its March FOMC meeting. Recent improvements in the economy and developments in Europe have tended to lessen the drive for additional stimulus from the Fed, such as another round of quantitative easing. While pricing pressures have begun to accelerate again – led by higher energy and raw material prices – core inflation as a whole remains modest, at least for now.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve Board’s Federal Open Market Committee (FOMC) is extending its policy of “exceptionally low” levels of interest through late 2014. Previous Fed statements – at least since August, when they originally started making this statement – had suggested that the federal funds rate would stay low through mid-2013. Aside from this, much of the statement was identical to its recent releases.

The extension of the time period through 2014 was met with a dissention from Richmond Federal Reserve Bank President Jeffrey Lacker, an inflation hawk and new member of the FOMC in 2012. Other new additions rotating on the FOMC this year include Dennis Lockhart (Atlanta), Sandra Pianalto (Cleveland) and John Williams (San Francisco). Each of them voted with the majority.

Regarding the economy, the Fed writes:

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Again, much of this is a repeat of the December statement with some minor tweaks. Despite some improvements in the domestic economy, the Federal Reserve remains worried about Europe and the continuing drags from an elevated unemployment rate and still-depressed (but slowly progressing) housing market.

In addition to extending its time horizon, the Fed plans to continue rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities. The intent of this policy is to push interest rates lower – particularly those impacting mortgages.

Chad Moutray is chief economist, National Association of Manufacturers.

Update: As part of the Ben Bernanke’s new communication strategy, the Fed has begun providing a more complete view of its economic assumptions and targets. According to its new release, the FOMC states that its interest rate target is 2 percent. By clearly stating this goal, it will allow the public to “keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances.”

Despite stating its target for interest rates, the Fed does not feel that it is appropriate to set a goal for employment. It determines that the longer-run normal rate of unemployment ranges between 5.2 and 6.0 percent, with the Fed’s ability to maximize employment more limited and constantly changing over time. 

In addition to this statement of targets, the Fed also released its economic projections over the coming years. Real GDP is expected to grow between 2.2 and 2.7 percent this year, which is slightly lower than its forecasts made in November.

The employment picture, though, improved from its earlier assessment, with the unemployment rate ranging from 8.2 to 8.5 percent. The November projection was between 8.5 and 8.7 percent. Note that the unemployment rate is still expected to fall very slowly, with the unemployment rate ranging from 6.7 to 7.6 percent in 2014, depending on the differing projections provided by various Fed officials.

Inflation is expected to range between 1.4 and 1.8 percent this year, an improvement from price increases experienced in 2011 and below the Fed’s key target of 2 percent.

The Federal Reserve Board observed a steep increase in U.S. consumer credit in November, particularly for nonrevolving accounts. There was $14.8 billion in additional borrowing among nonrevolving debt – an annualized increase of 10.7 percent – which now totals $1.68 trillion. Revolving debt, meanwhile, increased 5.6 billion, or 9.5 percent, to $789.3 billion.  Overall debt levels are now just shy of $2.5 trillion and have increased in every month in 2011 except August.

Individual interest rates remain low, with the average rate for a 48-month new car loan being 5.45 percent. This is down from the 5.90 percent average in the third quarter of 2011. For credit cards, the average rate in November was 12.36 percent.

Commercial banks remain the largest holders of consumer credit, with $1.08 trillion in credit outstanding. Finance companies and the federal government follow with $502.5 billion and $416.3 billion, respectively. The largest increase occurred among student loans outstanding (e.g., the federal government), which grew from $409.9 billion to $416.3 billion. 

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve Board’s Federal Open Market Committee has decided to keep interest rates exceptionally low, with the target federal funds rate at between 0 and 1/4 percentage points.

In its statement, the Fed writes:

“The Committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

It is notable that this decision was not unanimous. Presidents of the three regional Federal Reserve Banks: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia) all voted against the decision. The other notable feature of this statement is that interest rates are expected to stay in place for the next two years. Many economists – including myself – had predicted that rates would go up later this year, and so, this decision reflects the general weaknesses in the economy and need to keep rates lower for longer to stimulate growth.

Reflecting this weakness, the Fed wrote about it in very stark terms:

“Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable.”

For manufacturers, this means that interest rates will remain low, but it also suggests that the Federal Reserve remains worried about economic growth moving forward. As such, it will keep its policy in place of maintaining a low federal funds rate, which it has had in place since October 2008.

Chad Moutray is chief economist, National Association of Manufacturers.

Wonder if one could turn “spendthrift” into a transitive noun: “We must not spendthrift our children’s heritage.” “Did you see Bob last week? Man, he spendthrifted his way into the poorhouse.”  “They spendthrift with no consideration of the economic impact.”

Just a thought upon reading this Washington Post story, “Spike in Interest Rates Could Choke Recovery“:

Rising long-term interest rates are making it more expensive for home buyers, corporations and the U.S. government to borrow money, threatening to further stifle an already weak economy.

In just the past two weeks, the rate on a 30-year, fixed-rate mortgage has risen to 5.6 percent from 4.9 percent, ending a boom in refinancing and working against a budding recovery in the housing market. Rates on corporate borrowing have also risen, making it more expensive for companies to expand. And the government has been forced to pay more to finance its deficit.

And …

. Investors around the world are increasingly fearful that Congress and the Obama administration will be unwilling to bring taxes and spending in line in the years ahead. That makes the U.S. government appear to be a riskier borrower, leading those who lend to it to demand higher interest payments.

You can just hear the German bankers: “Schade. Sie haben zu viel thriftgespendet.”

A round-up of 0-based news about the Fed.

Federal Reserve Board of Governors, news release, December 16:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably.  In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Washington Post, “Dollar’s Slump Erases Months Of Solid Gains”

The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve‘s plan to print vast sums of cash dilute the value of the greenback.

The drops dramatically accelerated the dollar’s reversal of fortune over the past three weeks after months of solid gains. The slide underscores the risks the Federal Reserve is taking to jump-start the U.S. economy through aggressive monetary policy.

On Monday, the Fed cut its target for the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try to pull the United States from a worsening recession.

• CNNMoney.com, “The growing threat of deflation“
• Motley Fool, “Fed Announces it will Print as Much Money as Necessary“
• AP, “Car, home buyers could benefit from rate cut“
• London Times, “Analysts say Federal Reserve has fired all shots in its armoury“
• National Center for Policy Analysis, citing its fellow Bob McTeer, former head of the Dallas Bank, “The Fed’s Historic Move.”

And the story that prompted this round-up, front page of today’s Washington Post “Style” section, “Here Goes Nothing“:

How do you know things have gotten really, really bad? You know because we have gotten to zero.

Zero is the low beneath which there is no more low. It is nada. Naught. The absence of a thing. Zero: A losing score (blanked! shut out!). A depleted bank account. Less than the bare minimum. Zero: the big fat loser.

Finally, this round of news-numerology allows us the self-indulgence of remembering Tommy Keene, the Washington, D.C., guitar hero who never quite made it to the big-time but still deserves honor for his pop classic, “Back to Zero Now.” There’s no YouTube, so you’ll have to watch him play the Flaming Groovies’ “Shake Some Action” instead.