Tuesday, December 14, 2010

FOMC Decision and Comments ..

WASHINGTON (Dow Jones)--Federal Reserve officials stuck to their easy money policy of buying U.S. Treasury bonds and keeping short-term interest rates near zero amid new signs that the recovery is gathering some steam.

Fed officials also reaffirmed that their plan to buy $600 billion in U.S. Treasury debt through June would be subject to regular reviews and may be adjusted depending on how the economy fares. But after a one-day policy meeting--their last gathering of the year--they gave no indication that they're considering changing anything.

The Fed's widely expected decision came as new data showed consumers kicked off their holiday shopping with a burst of spending. Strong November retail sales and upward revisions to the prior two months led many private economists to raise their economic forecasts for the fourth quarter.

The Fed was restrained in its own assessment of how the economy is doing. The recovery is continuing, "though at a rate that has been insufficient to bring down unemployment", the central bank said in a statement at the end of the meeting. Consumer spending, a key growth engine for the U.S. economy, is increasing at a "moderate pace," officials said, adding as they have for months, that spending remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.

The Fed could be settling into a relatively quiet period after months of fraught decision-making. Because the bond buying program is scheduled to run through mid-2011, it could be in a position to spend the early part of next year assessing the program and the economy before signaling its next steps. Better economic growth and tame inflation take some pressure off the Fed to shift its stance for now, and taxes look likely to dominate Washington policy discussions.

Fed officials likely spent much of their meeting discussing how the bond buying is doing. The purchases are aimed at keeping longer-term borrowing rates, which are tied to U.S. Treasurys, low. They're also meant to drive investors into stocks and other riskier investments. The infusion of dollars into the financial system also has the potential to weaken the currency, which could help exports.

Many Fed officials believe the policy is working, though results have been mixed at best. Bond yields and the dollar fell in anticipation of the Nov. 3 decision to initiate the program, but both have jumped as stronger economic data and the tax-cut deal led investors to expect more growth and inflation--and to worry about budget deficits. Stock prices, meanwhile, have risen, a welcome development for the U.S. central bank.

Still, Fed officials say the program isn't a panacea. Top U.S. financial firms don't expect it to have big effects on either unemployment or prices, according to a survey released this week by the Securities Industry and Financial Markets Association, or Sifma. The survey also showed that 80% of respondents don't expect the Fed to increase short-term interest rates until 2012 or beyond. In its previous June forecast, more than 60% had predicted that the Fed would begin raising rates by mid-2011.

Jim O'Sullivan, chief economist at broker MF Global, said the Fed had one clear message: "We're not backing off. It's too soon to think about anything more, but we're not backing off of the $600 billion."

Kansas City Fed President Thomas Hoenig was the only dissenter to the Fed's decision Tuesday. Hoenig, who has formally objected to Fed policy at all eight of the committee's meetings this year, said in the release that easy money policies could, over time, increase long-term inflation expectations that may destabilize the economy.

Fed Chairman Ben Bernanke is likely to face some new dissent in 2011. Out of the four regional Fed bank presidents who will join the eight permanent voters on the FOMC next year, two have expressed reservations on the bond program: Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia Fed. Neither has been shy about casting dissenting votes in the past.

Despite the economy's recent signs of improvement, two factors are likely to keep the Fed wedded to the program. At 9.8%, unemployment remains far from the Fed's objectives almost 18 months after the recession officially ended. Moreover, despite recent surges in commodities prices, broader inflation looks stable.

The Labor Department reported Tuesday that wholesale prices in the U.S. jumped last month, but excluding the volatile food and energy sectors, they were up just 1.2% from a year earlier.

Stubbornly high unemployment and persistently low inflation leave the U.S. economy vulnerable to shocks such as a new debt crisis in Europe.

Fed officials reiterated that short-term interest rates would remain close to zero for an "extended period" to aid the economy's slow progress. They said the central bank will "continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery."

In addition to buying $600 billion in government bonds through June, the Fed stuck to its plan to buy $300 billion more in bonds to replace mortgage bonds in its portfolio that are being retired.

The bond purchases were debated intensely within the central bank, with some officials worried it could bring high inflation down the road and lead the dollar to weaken too much. The move was also attacked by top Republicans at home and foreign government officials from Germany to Japan, who worried it would hurt their export-driven economies.

-By Luca Di Leo, Jon Hilsenrath and Jeffrey Sparshott; 202 862 6682; luca.dileo@dowjones.com
(Tom Barkley and Jeff Bater contributed to this article.)

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=vVq%2BamM4XxGlCBfNRGNKYA%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires
December 14, 2010 14:51 ET (19:51 GMT)
Copyright (c) 2010 Dow Jones & Company, Inc.- - 02 51 PM EST 12-14-10WASHINGTON (Dow Jones)--The Federal Open Market Committee began its meeting at 8:30 a.m. EST Tuesday, as scheduled, a Federal Reserve spokeswoman said.
The Fed is expected to announce any decision the committee makes on short-term interest rates and release an accompanying statement on the economy at about 2:15 p.m. EST Tuesday.

-By Meena Thiruvengadam, Dow Jones Newswires; 202-862-6629; meena.thiruvengadam@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=vVq%2BamM4XxGlCBfNRGNKYA%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires
December 14, 2010 08:37 ET (13:37 GMT)

Copyright (c) 2010 Dow Jones & Company, Inc.- - 08 37 AM EST 12-14-10

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