–Adds Further Details on Summary of Economic Projections
By Steven K. Beckner
WASHINGTON (MNI) – Federal Reserve policymakers did not disappoint
financial markets Wednesday, as their Federal Open Market Committee
voted to extend “Operation Twist” to keep downward pressure on long-term
interest rates through the end of the year.
The economy has remained mired in subpar growth at 8.2%
unemployment despite unprecedented monetary easing action that has
included keeping the federal funds rate near zero for 3 1/2 years and
buying more than $2 trillion in bonds to push down long-term interest
rates to unheard-of levels. And lately, storm clouds from Europe have
threatened to further darken the outlook.
Against that backdrop, and with anxious financial markets expecting
some kind of Fed action, the FOMC voted 11 to 1 in favor of a second
edition of its “maturity extension program” or “Operation Twist.” It
reiterated its expectation that the federal funds rate will be kept near
zero “at least through late 2014.”
It’s hard to miss a note of frustration as the Fed explains why it
do more despite past deep interest rate cuts. Its policy statement says
job growth and consumer spending has slowed and that, despite
improvement, housing remains “depressed.” And, in a clear reference to
the European debt crisis, it says global financial strains “pose
significant downside risks to the outlook.”
So, in a further effort to spur growth and job creation, the Fed is
extending its “Operation Twist,” which was set to expire at the end of
the month, through the end of the year. That is, it will push down
long-term rates such as mortgage rates by selling short-term securities
and buying $267 billion of long-term bonds.
In a separate statement, the Federal Reserve Bank of New York,
whose open market desk will conduct the securities sales and purchases,
said the extended Operation Twist “will proceed at the current pace.”
Although the total amount of securities is to be purchases is less than
the $400 billion purchased in the original program, it will be conducted
over a shorter period — six months instead of eight to nine months.
MNI anticipated that an extension of “Operation Twist” would get “a
very close look” from the FOMC last month.
Once again, Richmond Federal Reserve Bank President Jeffrey Lacker
dissented, this time on the grounds that it was inappropriate to extend
Operation Twist.
It was the first time in more than seven years that the FOMC has
had its full complement of 19 participants, 12 of them voting, thanks to
Senate confirmation of Jerome Powell and Jeremy Stein to fill vacancies
on the Fed Board of Governors.
As expected, to prevent the Fed’s balance sheet from shrinking as
securities mature and roll off, the FOMC voted again to continue
reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities.
The FOMC altered its statement, saying it is “prepared to take
further action as appropriate to promote a stronger economic recovery
and sustained improvement in labor market conditions in a context of
price stability.”
The prior statement said the FOMC would “regularly review the size
and composition of its securities holdings and is prepared to adjust
those holdings as appropriate to promote a stronger economic recovery in
a context of price stability.”
And the FOMC said it will not continue a policy of rolling over
maturing Treasury securities at auction.
The New York Fed said “securities maturing in the second half of
2012 will be redeemed — that is, allowed to mature without reinvestment
— since redeeming maturing Treasury securities has a nearly identical
effect on the portfolio as selling securities that are approaching
maturityh.”
“Once the maturity extension program is completed, the Federal
Reserve will hold almost no securities maturing through January 2016,”
it added.
The New York Fed said it plans to buy Treasury securities with
remaining maturities of 6 years to 30 years and to sell or redeem an
equal par value of Treasury securities with remaining maturiites of
approximately 3 years or less.
The new economic forecasts prepared by the 19 FOMC participants and
released in the quarterly Summary of Economic Projections were
distinctly less optimistic than those released on April 25.
And the federal funds rate forecasts accompanying the SEP were
correspondingly more oriented toward keeping the federal funds rate
“exceptionally low.”
Fed presidents and governors marked down their forecasts for GDP
growth to 1.9-2.4% in 2012 (down from 2.4-2.9%). Next year, they expect
growth of 2.2-2.8% (down from 2.7-3.1%). And in 2014, the forecast is
for 3.0-3.5% growth (down from 3.1-3.6%).
With slower growth will come higher unemployment in the minds of
the FOMC participants. The unemployment rate is now seen at 8.0-8.2% for
the fourth quarter of this year (down from 7.8-8.0%). In the fourth
quarter of 2013, unemployment is projected at 7.5-8.0% (down from
7.3-7.7%).
Slower growth and greater slack is seen reducing inflation
pressures. Both the overall and core inflation forecasts have been
reduced. The officials now project 1.2-1.7% PCE inflation in the fourth
quarter of this year (down from 1.9-2.0%).
Six, rather than four, officials now expect the first funds rate
hike to be delayed until 2015, and 11 officials expect the funds rate
to be 75 basis points or less at the end of 2014. By contrast, in April
9 officials expected the funds rate to be 1% or less at the end of 2014.
The maximum funds rate level that anyone expects is 3%, and only
one person expects it to be that high.
** MNI Washington Bureau: 202-371-2121 **
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