Political India: Engaging America

From The Hindu

Shares tumbled on Wall Street and elsewhere in global financial markets this week as the United States Federal Reserve put out gloomy forecasts for the pace of the domestic economic recovery. In a statement, the Fed’s Federal Open Market Committee, its interest-rate-setting body, said, “The pace of recovery in output and employment has slowed in recent months.”

Citing the high rate of unemployment as a major drag on economic growth, the FOMC said, “Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” The Committee added that business spending on equipment and software was rising, yet investment in non-residential structures continued to be weak and employers remained reluctant to add to payrolls.

Expressing outright pessimism in some sectors, the FOMC said that housing starts remained at a “depressed level” bank lending “has continued to contract” and the pace of economic recovery was likely to be “more modest in the near term than had been anticipated”.

Coming on the back of a July joblessness report showing that 131,000 jobs were lost that month, the news from the Fed drove financial markets down. American equities continued to drop on Thursday after relatively steep declines on Wednesday too. Markets in Europe and Japan followed suit.

Only area of positive news

The sole area of positive news coming out of the Fed, however, was in the prognosis for inflation. The Fed said, it anticipated “a gradual return to higher levels of resource utilisation in a context of price stability”, and measures of underlying inflation had trended lower in recent quarters. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation was likely to be subdued for some time, the FOMC added.

In the light of such predictions, the Committee said it would maintain the target range for the federal funds rate at 0 to 0.25 per cent and continued to anticipate that economic conditions would warrant “exceptionally low levels of the federal funds rate for an extended period”.

The Fed further noted that in order to help support the economic recovery in a context of price stability, the Committee would keep constant the Fed’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

While most of the FOMC supported this view of the economic situation, the Fed conceded that on member of the Committee, Thomas M. Hoenig, had opposed the view, as he had judged that the economy was recovering modestly and believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Labels: economic recovery, U.S. Federal Reserve