Market Watch
Fed Says Recovery Has Slowed, Leaves Rates Unchanged
Federal Reserve officials restated their pledge to keep the benchmark overnight interest rate near zero for an “extended period” and said “the pace of recovery in output and employment has slowed in recent months.” “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in its statement following the conclusion of today’s meeting. Policymakers did not change the wording in their statement relating to the fed funds rate at all. “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability,” the statement noted.
Officials announced that the Fed would use the proceeds from its large mortgage-backed bond portfolio to buy long-term Treasury securities, making their first attempt to bolster economic growth since March 2009 to keep the economy from slipping back into recession. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level,” the Fed said.
The Federal Reserve has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then. Officials repeated their belief that the risk of inflation is low, saying “inflation is likely to be subdued for some time” noting that there is “substantial resource slack continuing to restrain cost pressures.”
Thomas Hoenig, president of the Kansas City Fed, dissented for the fifth straight meeting and said “the economy is recovering modestly, as projected” and “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed,” the statement said. Hoenig also did not believe that it was still necessary for the Fed to maintain the size of its holdings of longer-term securities.
Treasuries rallied as the Fed said it would reinvest principal payments on mortgage holdings into longer-term U.S. debt. Equities erased most of their early losses following the announcement with the Dow Jones Industrial Average coming close to positive territory after dropping over 100 points before the news. The next scheduled meeting of the committee is on September 21.
