Fed Maintains Monetary Course but Emphasizes Job Weakness

Posted on July 30, 2014 by

WASHINGTON — The Federal Reserve on Wednesday affirmed its commitment to stimulate the economy in a policy statement that said labor market conditions remained a “significant” distance from good health.

The Fed announced, as expected, that it would reduce its monthly bond purchases to $25 billion, but it gave no indication that recent signs of stronger growth had altered its determination to hold short-term interest rates near zero well into 2015.

Instead, the Fed emphasized its concern about the millions of Americans who still cannot find jobs. While the unemployment rate fell to 6.1 percent in June, “a range of labor market indicators suggests that there remains significant underutilization of labor resources,” the Fed said in a statement released after a two-day meeting of its policy-making committee.

The emphasis on unemployment was particularly striking as it came just hours after the government reported the economy recovered in the second quarter after a winter slump. The Fed’s statement acknowledged that growth had “rebounded,” but its tone was measured. It described the chances of faster growth as roughly balanced with the chances the expansion would slow down.

The statement gave little ground to critics who worry that the Fed is ignoring signs of rising inflation, although it said Fed officials had become less concerned that inflation would continue to run below the desired 2 percent annual pace.

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, was the sole vote in dissent, citing his concern about the Fed’s intent to maintain short-term interest rates near zero for “a considerable time” after the Fed ends the expansion of its bond holdings.

The Federal Reserve has already said that it plans to stop buying more bonds in October after making a penultimate purchase in September. The looming question is how long it will then wait to start raising interest rates.

Officials are struggling to reconcile an unusual set of economic trends: The economy continues to grow relatively slowly even as unemployment continues to decline relatively quickly. The government estimated on Wednesday that the economy expanded at a 1 percent annual rate in the first half of 2014, as stronger growth in the second quarter offset a brief contraction during the first quarter. The unemployment rate fell by half a percentage point over the same period, and by 1.4 percentage points over the last year.

Some Fed officials see evidence that the economy is settling into a new pattern of slower growth, and that monetary policy has substantially exhausted its power to improve the situation. They want the Fed to retreat more quickly from its stimulus campaign, fearing that holding down interest rates will result in higher inflation, or that it will encourage excessive risk-taking by investors.

“I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose, too long,” Richard Fisher, the president of the Federal Reserve Bank of Dallas, wrote in an op-ed article published Sunday by The Wall Street Journal. Fed officials normally avoid public comment in the days before the Federal Open Market Committee convenes in Washington.

But the Fed’s chairwoman, Janet L. Yellen, and her allies have taken a more cautious view, arguing that the decline in the unemployment rate appears to overstate the improvement in the labor market, because it counts only people who are looking for work. Ms. Yellen has said she expects some people who had been discouraged about their job prospects to return to the labor force as the economy continues to improve, and she has pointed to tepid wage growth as evidence that it remains easy to find workers.

“The recovery is not yet complete,” she told Congress this month.

The Fed also continues to grapple with the details of how to raise interest rates. They must decide on a role for the federal funds rate, the Fed’s primary tool before the financial crisis, which has lost much of its practical significance but remains a familiar benchmark for investors and the general public. The International Monetary Fund said in a recent report “there seems to be no clear benefit” to changing horses, noting its use in many financial contracts.

One of the alternatives available to the Fed is setting interest rates by borrowing money from nonbank financial companies. This has raised concerns that the Fed would be soaking up valuable liquidity during market downturns, because it would be perceived by investors as the safest place to store money.

Ms. Yellen convened a special session Tuesday morning to discuss these issues, as she has done before several of the Fed’s recent meetings. She said at a June news conference that details will be coming later this year.

More From NY Times

 

This entry was posted in Featured Articles and tagged . Bookmark the permalink.