Thursday, May 20, 2010
Slack in U.S. economy will remain elevated: FOMC
From The Hindu
The United States economy is continuing to show signs of improvement but “economic slack would continue to be quite elevated for some time,” according to the minutes of the April meeting of the interest-rate-setting Federal Open Markets Committee of the U.S. Federal Reserve.
The FOMC argued that in light of this slack and an economic outlook in which inflation would remain low, “members agreed that it would be appropriate to maintain the target range of zero to ¼ per cent for the federal funds rate.” One member of the FOMC, Thomas Hoenig, cast a dissenting vote, arguing for an increase in the federal funds rate towards one per cent.
The Committee further reiterated that the expectation that economic conditions — including low levels of resource utilisation, subdued inflation trends, and stable inflation expectations — were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.”
In terms of the overall prognosis for the U.S. economy the FOMC minutes, released on Wednesday, indicated that the majority on the Committee, including Fed Chairman Ben Bernanke, believed that “on balance, the economic recovery was proceeding at a moderate pace and… the deterioration in the labour market was likely coming to an end.”
The FOMC noted that while consumer spending continued to post solid gains in the first three months of the year and industrial production continued to expand at a brisk pace during the first quarter, residential construction was still depressed, construction of non-residential buildings remained on a steep downward trajectory, and state and local governments continued to retrench. In this context consumer price inflation continued to remain low, the Committee said.
The labour market, the top economic and political concern for the White House this year, showed signs of a nascent recovery in recent months, the Committee’s economists noted. The minutes suggested that private non-farm payroll employment increased over the first quarter of 2010 — this was the first quarterly increase since the onset of the recession.
Yet it was not all good news on the job front: while the average workweek also last quarter, the unemployment rate held steady at 9.7 per cent throughout the first quarter, and the labour force participation rate increased over the past few months “finding a job remained very difficult, and the average duration of unemployment spells increased further,” the FOMC cautioned.
In terms of the dissenting vote Mr. Hoenig said he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period,” as he was concerned that communicating such an expectation could lead to the build-up of future financial imbalances and increase the risks to longer-run macro-economic and financial stability.
Mr. Hoenig argued the target for the federal funds rate ought to be increased toward one per cent “this summer,” and the Committee could then pause to further assess the economic outlook. He emphasised that such an approach would leave “considerable policy accommodation in place to foster an expected gradual decline in unemployment in the quarters ahead.”
The United States economy is continuing to show signs of improvement but “economic slack would continue to be quite elevated for some time,” according to the minutes of the April meeting of the interest-rate-setting Federal Open Markets Committee of the U.S. Federal Reserve.
The FOMC argued that in light of this slack and an economic outlook in which inflation would remain low, “members agreed that it would be appropriate to maintain the target range of zero to ¼ per cent for the federal funds rate.” One member of the FOMC, Thomas Hoenig, cast a dissenting vote, arguing for an increase in the federal funds rate towards one per cent.
The Committee further reiterated that the expectation that economic conditions — including low levels of resource utilisation, subdued inflation trends, and stable inflation expectations — were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.”
In terms of the overall prognosis for the U.S. economy the FOMC minutes, released on Wednesday, indicated that the majority on the Committee, including Fed Chairman Ben Bernanke, believed that “on balance, the economic recovery was proceeding at a moderate pace and… the deterioration in the labour market was likely coming to an end.”
The FOMC noted that while consumer spending continued to post solid gains in the first three months of the year and industrial production continued to expand at a brisk pace during the first quarter, residential construction was still depressed, construction of non-residential buildings remained on a steep downward trajectory, and state and local governments continued to retrench. In this context consumer price inflation continued to remain low, the Committee said.
The labour market, the top economic and political concern for the White House this year, showed signs of a nascent recovery in recent months, the Committee’s economists noted. The minutes suggested that private non-farm payroll employment increased over the first quarter of 2010 — this was the first quarterly increase since the onset of the recession.
Yet it was not all good news on the job front: while the average workweek also last quarter, the unemployment rate held steady at 9.7 per cent throughout the first quarter, and the labour force participation rate increased over the past few months “finding a job remained very difficult, and the average duration of unemployment spells increased further,” the FOMC cautioned.
In terms of the dissenting vote Mr. Hoenig said he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period,” as he was concerned that communicating such an expectation could lead to the build-up of future financial imbalances and increase the risks to longer-run macro-economic and financial stability.
Mr. Hoenig argued the target for the federal funds rate ought to be increased toward one per cent “this summer,” and the Committee could then pause to further assess the economic outlook. He emphasised that such an approach would leave “considerable policy accommodation in place to foster an expected gradual decline in unemployment in the quarters ahead.”
Labels: economic climate, FOMC, U.S. Federal Reserve, United States economy
# posted by Narayan Lakshman @ 4:09 PM 
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