Fed to Maintain Record Stimulus After Ending Bond Purchases
June 22 (Bloomberg) -- Federal Reserve officials said they will maintain record monetary stimulus to support a flagging economic recovery after completing a $600 billion bond-purchase program as scheduled this month.
"The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings," the Federal Open Market Committee said today in a statement after a two-day meeting in Washington. "The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected."
Fed Chairman Ben S. Bernanke has said record-low interest rates are still needed to spur a recovery that remains "frustratingly slow" two years after the recession ended. Consumer spending has been held back by falling home values, accelerating inflation and an unemployment rate that rose to 9.1 percent last month. At the same time, Bernanke has said growth is likely to pick up as commodity costs recede and factories overcome disruptions of supplies from Japan.
"Recent labor market indicators have been weaker than anticipated," the statement said. "The slower pace of the recovery reflects in part factors that are likely to be temporary," such as supply chain disruptions stemming from the March earthquake and tsunami in Japan.
Stocks, Bonds
The Fed left its benchmark interest rate in a range of zero to 0.25 percent and repeated a pledge to keep it there "for an extended period." The decision was unanimous.
The Standard & Poor's 500 Index rose 0.1 percent to 1,296.72 at 1:23 p.m. in New York. The yield on the 10-year Treasury note was 2.98 percent, little changed from late yesterday.
Fed officials will release their economic forecasts for 2011-2013 at 2 p.m. today, and Bernanke plans to hold a press conference at 2:15 p.m.
"Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate."
The Fed will aim to keep the domestic securities holdings in its System Open Market Account at about $2.654 trillion, according to separate a statement today from the Federal Reserve Bank of New York.
'Add Some Juice'
"They want to keep as accommodative as possible for as long as they can to hopefully add some juice to the economy and raise demand until the recovery is on a firmer footing," said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "They acknowledged economic conditions have deteriorated since the April meeting."
The U.S. economy grew at an annual rate of 1.8 percent in the first quarter, down from 3.1 percent in the fourth quarter of 2010, and recent data have shown manufacturing and consumer and business sentiment weakening.
Bernanke said on June 7 that policy makers will "closely monitor" inflation, while predicting that price increases will ease in the medium term. The consumer price index rose 3.6 percent for the 12 months ending in May, the most since October 2008, as food and fuel prices drove the benchmark higher. So- called core CPI, the index excluding food and fuel, rose 1.5 percent during the same period, the most since January 2010.
Raw Materials
"Higher raw material costs" prompted Orrville, Ohio-based J.M. Smucker Co. to boost prices, effective in May, across "key categories including coffee, peanut butter, fruit spreads, oil and various baking products," Richard Smucker, co-chief executive officer, said in a conference call with analysts on June 9. The company produces Folgers Coffee, Jif peanut butter and Smucker's jams and jellies.
Without slower inflation and a bigger deterioration in growth, Bernanke sees no reason to expand stimulus, said Julia Coronado, North America Chief Economist for BNP Paribas in New York.
"Monetary policy isn't getting any easier," Coronado said before the statement was released. "We haven't met the threshold for quantitative easing three, and the economy is going to struggle to gain traction," she said, referring to a third round of bond purchases.
Investor expectations for long-term inflation have fallen. Price increases will average 2.53 percent a year for the five years starting 2016, according to a measure of yields on Treasuries indexed to inflation and nominal Treasury notes tracked by Barclays Capital Inc. in New York. That's down from the 12-month high of 2.99 percent on April 14.
Property Values
Households find little cause to step up spending. The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent in March from a year earlier, the biggest year-over-year decline since November 2009.
Also, real average hourly earnings fell 1.6 percent in May from a year earlier, and the Standard and Poor's 500 Index has fallen about 5 percent from its 2011 peak on April 29.
"We expect the recovery will continue to be slow and uneven, particularly for more moderate-income households," Gregg Steinhafel, chairman and chief executive of Minneapolis- based Target Corp., the second largest U.S. discount retailer, told investors last month. "These households need to see further improvements in housing and income growth before they'll have the capacity to meaningfully increase their discretionary spending."
Economists at several U.S. government bond dealers reduced their estimates for second-quarter growth in recent weeks.
Goldman Sachs
Barclays Capital cut its forecast to a 2 percent annual rate from a prior estimate of 3.5 percent, and JPMorgan Chase & Co. economists reduced their estimate to a 2 percent annual rate from 2.5 percent. Goldman Sachs Group Inc. cut its estimate to a 2 percent rate from 3 percent.
The economy's moderate growth rate combined with rising core inflation measures have left Fed policy in "a zone of inaction," Goldman Sachs economists said in a report on June 17. It would take a 1.25 percentage point increase in the unemployment rate or a 1 point drop in core inflation to trigger an increase in Fed stimulus, the economists said.
"There is little prospect of either monetary tightening or monetary easing anytime soon," Goldman Sachs economist Sven Jari Stehn said before the Fed released its statement.
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net Jeannine Aversa at javersa@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Find out more about Bloomberg for iPad: http://m.bloomberg.com/ipad/
