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.