Tuesday, August 23, 2011
U.S. Fed promises to hold rates near zero for two years
From The Hindu
The U.S. Federal Reserve has promised to hold U.S. interest rates at “exceptionally low levels” until the middle of 2013, in the wake of the worst market turmoil last week, since the financial meltdown of 2008.
“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today [Tuesday] to keep the target range for the federal funds rate at 0 to 0.25 per cent,” the Fed said in a split decision that was however backed by its Chairman, Ben Bernanke.
Seven members of the rate-setting Federal Open Market Committee voted for the decision to hold rates at such low levels while three members, including Indian-American Narayana Kocherlakota, dissented.
The dissenters “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period,” the Fed said in a statement.
The central bank's unusual statement appeared to achieve the desired short-term effect as stock markets round the world rallied with the U.S. Dow Jones index closing the day up 429 points and London's FTSE 100 climbing 64 points in early trading on Wednesday, following Tuesday's gain of 96 points.
However, the Federal Reserve continued to emphasise that significant downside risks remained.
In a statement it said, “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually”.
While the FOMC said that it expected that inflation would settle over the coming quarters, at levels at or below those consistent with the Committee's dual mandate [to foster maximum employment and price stability], it added that it would “continue to assess the economic outlook in light of incoming information and is prepared to employ [a range of policy] tools as appropriate.”
Labels: financial meltdown, U.S. debt crisis, U.S. Federal Reserve
Saturday, August 28, 2010
U.S. economy posts lower growth in second quarter
From The Hindu
Compounding heightened insecurity on the prospect of a double-dip recession, the U.S. Commerce Department on Friday released a gloomy second-quarter report that showed economic growth had remained flat at 1.6 per cent.
The rate was significantly lower than the 2.4 per cent that a majority of surveyed economists had expected, and combined with an unemployment rate stuck stubbornly at 9.5 per cent, it has cast serious doubts upon the prospects for a sustained recovery under the Obama administration.
However, in a speech on Friday, Ben Bernanke, Chairman of the Federal Reserve, said that he expected the economy “to continue to expand in the second-half of this year, albeit at a relatively modest pace.”
Mr. Bernanke added that the Fed stood ready to undertake policy measures to support what growth was there, noting that additional purchases of longer-term securities, should the Federal Open Market Committee choose to undertake them, would be effective in further easing financial conditions.
The Fed Chairman also underscored that the employment situation had not shown adequate improvement. He noted that data on the labour market remained “disappointing,” and private sector employment grew only sluggishly.
He further said that the small decline observed in the unemployment rate was attributable “more to reduced labour force participation than to job creation, and initial claims for unemployment insurance remain high.”
Emphasising the flexible approach of the Fed to deal with a variety of possible economic outcomes he said that the central bank was already supporting the economic recovery by maintaining an “extraordinarily accommodative monetary policy, using multiple tools.” Should further action prove necessary, Mr. Bernanke added, policy options were available to provide additional stimulus.
Compounding heightened insecurity on the prospect of a double-dip recession, the U.S. Commerce Department on Friday released a gloomy second-quarter report that showed economic growth had remained flat at 1.6 per cent.
The rate was significantly lower than the 2.4 per cent that a majority of surveyed economists had expected, and combined with an unemployment rate stuck stubbornly at 9.5 per cent, it has cast serious doubts upon the prospects for a sustained recovery under the Obama administration.
However, in a speech on Friday, Ben Bernanke, Chairman of the Federal Reserve, said that he expected the economy “to continue to expand in the second-half of this year, albeit at a relatively modest pace.”
Mr. Bernanke added that the Fed stood ready to undertake policy measures to support what growth was there, noting that additional purchases of longer-term securities, should the Federal Open Market Committee choose to undertake them, would be effective in further easing financial conditions.
The Fed Chairman also underscored that the employment situation had not shown adequate improvement. He noted that data on the labour market remained “disappointing,” and private sector employment grew only sluggishly.
He further said that the small decline observed in the unemployment rate was attributable “more to reduced labour force participation than to job creation, and initial claims for unemployment insurance remain high.”
Emphasising the flexible approach of the Fed to deal with a variety of possible economic outcomes he said that the central bank was already supporting the economic recovery by maintaining an “extraordinarily accommodative monetary policy, using multiple tools.” Should further action prove necessary, Mr. Bernanke added, policy options were available to provide additional stimulus.
Labels: Bernanke, U.S. economy, U.S. Federal Reserve
Thursday, August 12, 2010
Markets drop following gloomy outlook of U.S. Fed
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
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
Saturday, April 10, 2010
Bernanke harps on fiscal discipline
From The Hindu
Striking a note of concern about the fiscal situation in the United States, Ben Bernanke, Chairman of the Federal Reserve, said “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
In a speech to the Dallas Regional Chamber of Commerce on Wednesday Mr. Bernanke explained that addressing the fiscal challenges posed by an aging population would require “a willingness to make difficult choices.”
However, he cautioned that the economy continued to operate “well below its potential,” implying that sharp near-term reductions in the fiscal deficit would probably neither be practical nor advisable.
Mr. Bernanke argued that the U.S. ought to demonstrate a strong commitment to fiscal responsibility, for if it did not do so, in the longer run, the country would have neither financial stability nor healthy economic growth.
While he described the short and long-term economic challenges faced by the U.S. as “daunting”, he also touched a cautiously optimistic note when he said, “My best guess is that economic growth, supported by the Federal Reserve's stimulative monetary policy, will be sufficient to slowly reduce the unemployment rate over the coming year.”
He further added that although unemployment rate had “edged off its recent peak” at 9.7 percent, it was still close to its highest level since the early 1980s, and hiring remained “very weak.”
On the housing sector, at the heart of the economic crisis since 2008, Mr. Bernanke voiced continuing concern, saying, “We have yet to see evidence of a sustained recovery in the housing market. Mortgage delinquencies for both subprime and prime loans continue to rise, as do foreclosures.” He additionally warned that the commercial real estate sector remained troubled, and that was a concern for communities and for banks holding commercial real estate loans.
Mr. Bernanke expressed support for the ongoing Congressional efforts – led by Senator Chris Dodd – to get new financial regulation bills passed: “The Federal Reserve strongly supports ongoing congressional efforts to reform our financial regulatory framework,” he said.
However, he added, “But we are not waiting for new legislation to make improvements. We have been working hard to strengthen our own oversight of financial institutions and to broaden our field of vision to include potential risks to the financial system as a whole as well as risks to individual firms.”
Labels: economic recession, housing sector, U.S. Federal Reserve
Tuesday, March 16, 2010
U.S. Fed to hold rates low as economy slowly improves
From The Hindu
Interest rates will be held in the range of 0-0.25 per cent for an extended period in anticipation of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations”, the United States Federal Reserve’s said today.
Following the Fed’s announcement, equity markets closed at an 18-month high and US Treasury yields declined, according to reports.
The Fed’s Federal Open Market Committee, which last met in January, hinted at improving conditions in the U.S. economy, pointing out that business spending on equipment and software rose “significantly” and household spending expanded moderately. However the latter remained constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, the FOMC cautioned.
The FOMC added a note of explanation on its efforts to bolster the mortgage finance market through credit securities purchases. “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt,” it said.
Commenting on the overall macroeconomic picture the FOMC said that economic activity continued to strengthen and that “the labor market is stabilizing”. However, it added that employers remain reluctant to add to payrolls. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Nine out of ten members of the FOMC voted for the FOMC to hold rates low. The one dissent vote came from Thomas M. Hoenig, who held that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the build-up of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”
Interest rates will be held in the range of 0-0.25 per cent for an extended period in anticipation of “low rates of resource utilization, subdued inflation trends, and stable inflation expectations”, the United States Federal Reserve’s said today.
Following the Fed’s announcement, equity markets closed at an 18-month high and US Treasury yields declined, according to reports.
The Fed’s Federal Open Market Committee, which last met in January, hinted at improving conditions in the U.S. economy, pointing out that business spending on equipment and software rose “significantly” and household spending expanded moderately. However the latter remained constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, the FOMC cautioned.
The FOMC added a note of explanation on its efforts to bolster the mortgage finance market through credit securities purchases. “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt,” it said.
Commenting on the overall macroeconomic picture the FOMC said that economic activity continued to strengthen and that “the labor market is stabilizing”. However, it added that employers remain reluctant to add to payrolls. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Nine out of ten members of the FOMC voted for the FOMC to hold rates low. The one dissent vote came from Thomas M. Hoenig, who held that “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the build-up of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”
Labels: FOMC, global economy, global recovery, interest rates, Narayan Lakshman, U.S. Federal Reserve
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