WASHINGTON (FILED at 2:40 p.m. ET 5/1/13)--As expected, the Federal Reserve's monetary policymakers, the Federal Open Market Committee (FOMC), held the line on the Fed's bond-buying and interest rates another month. However, it formally announced, for the first time, that it would increase or decrease the bond buying policy "as the outlook for the labor market or inflation changes."
Noting that "economic activity has been expanding at a moderate pace," the committee, in its statement today after a two-day meeting, said it will continue buying back $40 billion a month in Treasuries and $45 billion a month in mortgage-backed securities (MBS) as part of its continued quantitative easing policy.
The targeted federal funds rate for short-term loans remains at 0% to 0.25%. The Fed has said in the past it would keep the rates at near-zero levels until unemployment fell to 6.5% or lower--if inflation forecasts were no more than 2.5%. Currently the unemployment rate is at 7.6%, and the inflation gauge is below the 2% target.
The FOMC noted that labor market conditions have shown some improvement in recent months but the unemployment rate remains elevated. "Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable," said its statement.
The committee said that "with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate" of price stability and fostering maximum employment.
FOMC "continues to see downside risks to the economic outlook" and "anticipates that inflation over the medium term likely will run at or below its 2% objective."
In deciding to continue to purchase more agency MBS and longer-term Treasury securities, known as quantitative easing, FOMC said it "is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
The committee "will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability," the statement said. It added the FOMC "is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives."
In deciding to keep the target range for federal funds at 0% to 0.25%, FOMC said it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." It anticipates "that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.
In determining how long to maintain a highly accommodative stance of monetary policy, the committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. "When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."
Voting for the policy action were Fed Chairman Ben S. Bernanke; Vice Chairman William C. Dudley; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.
Esther L. George, who voted against the action, said she was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
For the full statement, use the link.