The Fed will take action to keep interest rates low! See below article from Bloomberg.com.
Bloomberg News, sent from my Android phone
The Federal Reserve will expand its program to replace short-term bonds with
longer-term debt by $267 billion through the end of 2012 in a bid to reduce
unemployment and protect the expansion.
The continuation of Operation Twist “should put downward pressure on
longer-term interest rates and help to make broader financial conditions more
accommodative,” the Federal Open Market Committee said today in a statement at
the conclusion of a two-day meeting in Washington.
The Fed said it is “prepared to take further action as appropriate to
promote a stronger economic recovery and sustain improvement in labor market
conditions in a context of price stability.”
Policy makers led by Chairman Ben S. Bernanke are taking steps to shore up
the world’s largest economy as faltering growth leaves it vulnerable to fallout
from the European debt crisis and looming fiscal tightening in the U.S.
Payrolls expanded at the slowest pace in a year in May, and the jobless rate
has been stuck above 8 percent since February 2009.
“Growth in employment has slowed in recent months, and the unemployment rate
remains elevated,” the FOMC said. “The Committee expects economic growth to
remain moderate over coming quarters and then to pick up very gradually.”
The yield on the 10-year Treasury note rose to 1.67 percent at 1:23 p.m. in
New York from 1.62 percent late yesterday. The Standard & Poor’s 500 Index
was little changed at 1,358.17 after declining as much as 0.9 percent.
Language Change
“The Fed will do more as necessary, and this puts emphasis on it,” said Eric
Green, a former New York Fed economist who is now global head of FX, Rates and
Commodities at TD Securities in New York. In April the committee said it was
“prepared to adjust” its securities holdings “as appropriate”
Policy makers left unchanged their view that economic conditions will
probably warrant keeping interest rates “exceptionally low” at least through
late 2014. The FOMC has kept the main interest rate in a range of zero to 0.25
percent since December 2008.
The Fed said today it will sell Treasury securities with remaining maturities
of about three years or less. It will purchase securities with six years to 30
years remaining.
The existing maturity extension program, known as Operation Twist, was
announced in September and expires this month. Under that program, the Fed is selling
$400 billion of short-term government debt and replacing it with the same
amount of longer- term Treasuries.
Maturing Debt
The Fed left unchanged its policy of reinvesting its portfolio of maturing
housing debt into agency mortgage-backed securities.
Inflation “has declined, mainly reflecting lower prices of crude oil and
gasoline, and longer-term inflation expectations have remained stable,” the Fed
said today. Oil prices have slumped 23 percent to $84.03 a barrel yesterday
since reaching a high of $109.77 a barrel in February, while the national
average cost of gasoline has declined to $3.49 a gallon from a 2012 peak of
$3.94 in April, according to data compiled by the American Automobile
Association.
Richmond Fed President Jeffrey Lacker dissented for the fourth meeting in a
row, saying he doesn’t support extending Operation Twist. He said last month he
believes the central bank will probably need to raise the main interest rate
next year.
It was the first meeting for Governors Jeremy Stein and Jerome Powell, who
joined the Fed last month, raising the Washington-based board to its full,
seven-member strength for the first time since 2006.
Updated Projections
U.S. central bankers at 2 p.m. plan to release updated projections for
economic growth, inflation and unemployment for the next three years. Chairman
Ben S. Bernanke is scheduled to hold a press conference at 2:15 p.m. in
Washington.
Fifty-eight percent of economists in a June 18 Bloomberg News survey said
the FOMC would prolong Operation Twist, with an additional 8 percent predicting
the Fed would announce the move at its meeting on July 31-Aug. 1. Eleven
percent predicted a third round of large-scale asset purchases, or quantitative
easing.
Central banks across the world are considering steps to stimulate their
economies. Bank of England Governor Mervyn King and three other policy makers
were overruled this month as they pushed to expand their bank’s bond-purchase
program, meeting minutes showed today. European Central Bank President Mario
Draghi left the door open for a rate cut at a June 6 press conference.
Bank of Japan
The Bank of Japan should be ready to “take appropriate actions without
ruling out any options in advance” if the European crisis worsens, some of its
board members said in May, according to minutes released today. The People’s
Bank of China cut borrowing costs for the first time since 2008 earlier this
month and loosened controls on banks’ lending and deposit rates.
Europe’s debt crisis has intensified since the FOMC’s meeting in April,
roiling financial markets. The Standard & Poor’s 500 Index was down by 4.3
percent as of yesterday from its 2012 peak on April 2.
Since the Fed announced Operation Twist on Sept. 21, the yield on the
10-year U.S. Treasury note declined to 1.62 percent as of yesterday from 1.86
percent. It fell to a record low 1.4387 on June 1.
Spanish 10-year bond yields rose above 7 percent for the first time this
week in the shared-currency era even after Spain said it will seek a 100
billion-euro ($127 billion) rescue for its banks.
Global asset prices have rallied since Greek election results stirred
speculation the nation won’t exit the euro, and on expectations the Fed would
take action to spur growth.
Asset Purchases
The Fed’s two rounds of asset purchases totaling $2.3 trillion and
record-low interest rates since December 2008 have left the central bank short
of its full-employment goal.
The economy added 69,000 jobs in May, the fewest in a year, and the
unemployment rate unexpectedly climbed to 8.2 percent from 8.1 percent, its
first increase in almost a year.
Policy makers in April forecast an unemployment rate of 7.8 percent to 8
percent in the fourth quarter of this year and 7.3 percent to 7.7 percent at
the end of 2013. Their employment goal is 5.2 percent to 6 percent, according
to April’s central tendency forecasts.
Companies are cutting back as the economy shows signs of slowing. FedEx
Corp., operator of the world’s largest cargo airline, is restructuring its
express business and retiring 24 jet freighters.
Impact of Crisis
“We believe U.S. domestic and global economic conditions will be impacted by
the European debt crisis, slowing growth in Asia and the uncertainty these
issues create on the global economy and the demand for our services,” FedEx
Chief Financial Officer Alan Graf said yesterday on an earnings call.
Also taking a toll on the economy: concern that Congress will fail to reach
a compromise in time to avoid $600 billion in tax increases and budget cuts
next year.
Among government contractors coping with delayed procurements and agency
cost-cutting is Preferred Systems Solutions, a Vienna, Virginia-based
engineering and information technology provider.
“I’m feeling more of a pinch and squeeze than I ever have before,” said
Scott Goss, president and chief executive officer. “As soon as they start these
massive cuts, they’re going to impact the economy.”
Economic data in recent weeks have pointed to slowing growth.
Retail Sales
Retail sales fell 0.2 percent for a second month in May, according to a June
13 report from the Commerce Department, as elevated unemployment and the
smallest wage gains in a year prompted consumers to curtail their spending.
Industrial production unexpectedly fell in May for the second time in three
months as factories turned out fewer vehicles and consumer goods, data from the
Fed showed last week.
On the other hand, housing, the industry at the heart of the financial
crisis, has shown some signs of recovery.
Homebuilders broke ground on more single-family houses for a third
consecutive month in May and rising construction permits pointed to further
gains.
Borrowing costs near record lows are prompting home purchases, said Douglas
Yearley, chief executive officer of Toll Brothers, a luxury homebuilder based
in Horsham, Pennsylvania.
“There is huge pent-up demand that has built over the last four years,”
Yearley said at a June 14 conference. “It’s been seven years since this all
began to turn down and you have people that are just ready to move on with
their lives, take advantage of great interest rates.”
Mortgage Rates
The average rate on a 30-year, fixed mortgage fell to a record 3.67 percent
in the first week of June, according to Freddie Mac.
The Fed’s actions may influence the November presidential election.
Unemployment and the economy are a central issue as Mitt Romney, the
presumptive Republican nominee, challenges President Barack Obama.
Romney, who has charged Obama with mismanaging the economy, said in a June
17 CBS News interview that quantitative easing didn’t yield the intended
benefits and a third round wouldn’t either.
The second round “was not extraordinarily harmful, but it does put in
question the future value of the dollar and it will obviously encourage some
inflation,” Romney said. “A QE3 would do the same thing.”
To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
Find out more about Bloomberg for Android: http://m.bloomberg.com/android
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