Fed Maintains Loose Monetary Policy, Calls GDP Growth 'Insufficient'

Before you go, we thought you'd like these...
Federal Reserve The Federal Reserve Tuesday kept its current accommodative monetary policy going steadily and continued its program of quantitative easing, saying the economic recovery is continuing, but the growth rate "has been insufficient to bring down unemployment."

"Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit," the Fed said in its statement. "Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed."

The Fed kept its fed funds target in the 0% to 0.25% range, unchanged for the 22nd-straight month, and it maintained the same stance or tone regarding its future interest rate policy, reiterating that it will keep rates "exceptionally low" for an "extended period. The Fed made no new asset purchases.

Regarding inflation, the Fed said, "Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward."

Thomas Hoenig Is the Lone Dissenter Again

The Fed also announced no changes to the QE2, its $600 billion, eight-month asset-buying program known as quantitative-easing. When the plan was announced at its last meeting, the Fed said it would buy up to $75 billion in assets per month.

The Fed added that the QE2 purchases will "promote a stronger pace of economic recovery" while keeping prices stable "over time."

The Fed's board vote to continue on the same course was 11-1, with Kansas City Fed President Thomas Hoenig again voting against the program, dissenting for the eighth straight Fed meeting. Hoenig has argued that the "continued high level of monetary accommodation" may eventually "destabilize the economy."

Small-Business Confidence Is Rising

The Fed's announcement had little impact on either the U.S. stock or bond markets, at least initially.

Sponsored Links
The Dow Jones Industrial Average, up about 75 points at 11,503 prior to the Fed's announcement, remained essentially the same, up about 70 points to 11,493 in the initial minutes afterward. The Dow closed up 47 points. The yield on the 10-year U.S. Treasury note, at 3.38% before the announcement, was essentially unchanged at 3.39% initially but closed at 3.46%.

The Fed's meeting took place on the heels of a November survey showing the highest confidence among small-business owners since the recession started in December 2007. The National Federation of Independent Business's optimism index increased to 93.2 in November from 91.7 in October, its highest level since December 2007.

The NFIB report is based on a survey of about 800 small business owners, who were surveyed through November 30. Small businesses -- companies employing up to 500 people -- have created about 65% of all new jobs in the past 17 years.

Still 15 Million Jobs Short

Some economists argue that the signs of a strengthening U.S. economy should be enough for the Fed to abandon its quantitative easing program. They cite the revised 2.5% third-quarter GDP growth rate, up from the initial 2% estimate, as primary evidence.

A much larger camp of economists, however, argues that the policy should continue, pointing to the nation's comparatively low GDP growth rate in the initial stage of the expansion, and the fact that the U.S. economy is short about 15 million jobs -- not counting part-time employees who want full-time work -- as ample proof that further stimulus is needed.
Read Full Story

People are Reading

The Latest from our Partners
1 - 3 of 15