Fed stands pat on bond repurchase plans

By Reuters
Posted Dec. 14, 2010 at 1:37 p.m.

The U.S. Federal Reserve said on Tuesday the economic recovery was still too slow to bring down unemployment, reaffirming its commitment to purchase $600 billion in bonds to stimulate growth and create jobs.

In a statement that contained remarkably little acknowledgment of a recent uptick in the economic data, the Fed characterized the U.S. expansion as “continuing,” a modest upgrade from its November description of the recovery as “slow.”

While the meeting likely involved some re-evaluation of the economic outlook to account for the effects of proposed new tax cuts, the Fed noted measures of underlying inflation had continued to trend lower since its last meeting.

“The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment,” the Fed said in a statement at the conclusion of a one-day meeting.

Kansas City Fed President Thomas Hoenig again dissented against the move.

Early last month, the Fed launched a controversial program to buy $600 billion in longer-term Treasury securities by the middle of next year to support a weak economic recovery that was failing to generate jobs.

Called QE2 because it is the Fed’s second round of so-called quantitative easing through asset purchases, the initiative was assailed by critics concerned it could trigger inflation or set off a round of competitive currency devaluations by weakening the dollar.

Since the central bank launched the program, data on the economy has turned brighter. Strong November retail sales data on Tuesday added to evidence the recovery is gaining strength.

In addition, a deal between the White House and congressional Republicans to extend Bush-era income tax cuts included a surprise reduction in payroll taxes, which would provide an unexpected boost for the economy. Some forecasters said the deal could lift growth next year by as much as a full percentage point.

Policymakers are also likely to have pondered a spike in longer-term interest rates, a development that runs counter to the Fed’s intended goal for the asset purchases, which are aimed at lowering borrowing costs. Yields on the benchmark 10-year Treasury are at highs not seen since May.

It is difficult to gauge, however, how much of that rise is due to political criticism from of QE2, which may have led investors to question the Fed’s appetite for sticking with the easing program, how much is due to worries about inflation and the massive U.S. debt, and how much can be pinned to expectations of stronger growth.

Despite signs the recovery may be picking up steam, the unemployment has hovered near a lofty 10 percent for months and core inflation has been running at record lows.

Read more about the topics in this post: ,

Comments are closed.