Policy Makers Cite Sluggish Economy, Washington Gridlock in Standing Pat
By JON HILSENRATHand VICTORIA MCGRANE
By JON HILSENRATHand VICTORIA MCGRANE
Michelle Girard, RBS managing director and chief U.S. economist, joins the News Hub to gauge market reaction to the Federal Reserve’s move to keep its $85-billion-a-month bond-buying program in place.
Seeing a more uneven economic climate than they expected and the potential for fiscal discord in Washington, Federal Reserve officials got cold feet Wednesday and decided to keep their signature easy-money program in place for the time being.
The move, coming after Fed officials spent months alerting the public that they might begin to pare their $85 billion-a-month bond-buying program at the September policy meeting, marks the latest in a string of striking turnabouts from Washington policy makers that have whipsawed markets in recent days.
Seeing a more uneven economic climate than they expected and the potential for fiscal discord in Washington, Federal Reserve officials got cold feet Wednesday and decided to keep their signature easy-money program in place for the time being.
The move, coming after Fed officials spent months alerting the public that they might begin to pare their $85 billion-a-month bond-buying program at the September policy meeting, marks the latest in a string of striking turnabouts from Washington policy makers that have whipsawed markets in recent days.
Associated Press
Federal Reserve Chairman Ben Bernanke speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2013. The Federal Reserve has decided against reducing its stimulus for the U.S. economy, saying it will continue to buy $85 billion a month in bonds because it thinks the economy still needs the support.
Federal Reserve Chairman Ben Bernanke speaks during a news conference at the Federal Reserve in Washington, Wednesday, Sept. 18, 2013. The Federal Reserve has decided against reducing its stimulus for the U.S. economy, saying it will continue to buy $85 billion a month in bonds because it thinks the economy still needs the support.
Last week, President Barack Obama appeared to be on the brink of military strikes against Syria but pulled back at the last moment when lawmakers balked at the use of force and a diplomatic alternative emerged.
Then, Mr. Obama’s former economic adviser, Lawrence Summers, on Sunday bowed out of consideration to run the Fed amid mounting resistance from liberal Senate Democrats at what appeared to be his likely nomination. Late Wednesday, a White House official affirmed that Fed Vice Chairwoman JanetYellen, who has significant backing among Senate Democrats, is the front-runner for the Fed nomination.
Now, the Fed says it will carry on with a program investors had nervously been anticipating for months could gradually disappear.
More economic policy twists could come in the weeks ahead, as Mr. Obama squares off with congressional Republicans over a Sept. 30 deadline to pass legislation that funds the government in the coming fiscal year and a mid-October deadline to raise the federal borrowing limit.
Former Presidential Candidate and former Texas Congressman Ron Paul joins the News Hub to react to the Federal Reserve’s decision to continue its bond-buying program, and an impending government shutdown.
Investors seemed to like the prospect of continued easy money from the central bank. Stocks rallied and the Dow Jones Industrial Average closed up 147.21 points, or 0.95%, at a record level of 15676.94. Yields on 10-year Treasury notes, which had risen in recent months in anticipation of a September cutback in the Fed’s bond purchases, dropped to 2.701%.
The bond-buying program, also known as quantitative easing, or QE, was relaunched last year and is meant to stimulate economic growth and hiring by holding down interest rates and encouraging households and businesses to spend and invest. This round of purchases, together with earlier efforts along the same lines, has swelled the Fed’s holdings of securities to nearly $4 trillion.
Mr. Bernanke began signaling in May that, because the job market was gradually improving and because the Fed anticipated faster growth by year-end, the central bank might pull back on the bond-buying program.
After two days of deliberations, however, Fed officials decided Wednesday the economy hadn’t lived up to their expectations for growth. In fact, they lowered their growth estimates for this year and next—and expressed worry that a jump in long-term interest rates over the past several months could squeeze an already weak upturn.
“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” the Fed said in a statement after the meeting. “The [Fed] decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
Fed officials voted to keep short-term interest rates near zero, where they have been pinned since late 2008. Most officials indicated in their latest economic projections they expect to make the first rate increase in 2015 or later.
The Fed’s hesitance to begin winding down the bond-buying program might be the least surprising of all of the latest Washington plot twists. Officials had been wavering about ending the program in the days leading up to the Fed’s two-day meeting, according to their public comments and interviews with officials earlier this month. For many of them, it was always a close call.
Mr. Bernanke on Wednesday flagged the Fed’s new worries about fiscal policy. If Congress doesn’t pass legislation authorizing funding in the fiscal year that starts Oct. 1, a partial government shutdown will ensue. If it doesn’t raise the debt ceiling, the government could start missing payments, including those to military contractors, Social Security recipients and bondholders or others.
“A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy,” Mr. Bernanke said in his press conference following the policy meeting. “The Federal Reserve’s policy is to do whatever we can to keep the economy on course.”
His comments came on a day when House Republicans and the White House dug in on their opposing fiscal positions, raising the odds of a rolling showdown over budget issues in coming weeks.
Fed officials faced several economic conundrums at this week’s gathering. They have long been predicting economic growth would pick up, but so far it has failed to accelerate. In economic projections released by the central bank, officials lowered their estimates for growth this year to slightly more than 2%, a continuation of the anemic growth rate that has prevailed for much of the recovery.
Other indicators of the economy’s vigor have been mixed. Earlier Wednesday, for instance, the Commerce Department said that though home construction picked up in August, builders filed fewer permits for future construction last month, a potential sign of softening demand.
The labor market has been among the most vexing aspects of the economy for Fed officials. Employment growth slowed this summer. Still, the unemployment rate has fallen substantially since the Fed launched its bond-buying program last year—to 7.3% in August from 8.1%. One unwelcome reason for the drop is an exodus of workers from the labor force.
The Fed says it wants a lower unemployment rate, but Mr. Bernanke gave conflicting answers about how meaningful officials find the latest declines. At one point he said the unemployment rate was “perhaps the best single indicator of the state of the labor market.” But he later said “the unemployment rate is not necessarily a great measure in all circumstances of the state of the labor market overall.”
Mr. Bernanke also appeared to back away from a bond-buying marker the Fed had laid down in June. Then, Mr. Bernanke said at a press conference that officials expected the jobless rate to be around 7% when the Fed ended its $85 billion monthly bond buying program. He made no mention of that 7% marker in his statement Wednesday and played it down when asked about it. “There is not any magic number that we are shooting for,” Mr. Bernanke said. “We’re looking for overall improvement in the labor market.”
Amid all of this uncertainty, business leaders aren’t brimming with confidence.
Tom Riordan, chief executive of Neenah Enterprises, one of the largest independent foundry companies in the U.S., said he feels less optimistic than he did a year ago. The economy “looks pretty lethargic,” he said. The firm’s revenue and employment are both down slightly from a year ago, he said, despite the company gaining market share.
The company is a supplier to several major U.S. industries, including shipping, heavy industry and construction—all of which Mr. Riordan described as “very challenged.” Demand has been flat in its biggest market, tractor-trailer trucks, for which it supplies engine blocks, axles, drive trains and other parts.
Reports like this leave investors with the same questions that have nagged at them for much of the past six months. When will the Fed start unwinding its bond buying program? When will it finish it completely? Is the program working, or just loading the central bank up with future risks?
Those questions are compounded by a new one: Who will lead the Fed when Mr. Bernanke’s term is up at the end of January? He declined to talk about his future at the press conference. With Mr. Summers removing himself from contention, Ms. Yellen has become the front-runner. She is a big supporter of using the Fed’s easy-money programs to combat high unemployment.
Mr. Bernanke made clear in his press conference, and the Fed did in its policy statement, that the Fed could still take a step toward ending its bond-buying program before year-end. Mr. Bernanke said the Fed wants more confirmation of a pickup in economic growth, sustained job gains and proof that low inflation is moving back up toward the Fed’s 2% target.
The policy statement indicated a central bank watching carefully for the signs it needs to start pulling back. With so many twists in the economic landscape, Mr. Bernanke isn’t committing to anything. “We are tied to the data,” he said. “We don’t have a fixed calendar schedule.”
When asked if the Fed was confusing investors, the Fed chairman bristled.
“We can’t let market expectations dictate our policy actions,” he said. “Our policy actions have to be determined by our best assessment of what’s needed for the economy.
FOR MORE INFORMATION ON THIS TOPIC CLICK HERE
Then, Mr. Obama’s former economic adviser, Lawrence Summers, on Sunday bowed out of consideration to run the Fed amid mounting resistance from liberal Senate Democrats at what appeared to be his likely nomination. Late Wednesday, a White House official affirmed that Fed Vice Chairwoman JanetYellen, who has significant backing among Senate Democrats, is the front-runner for the Fed nomination.
Now, the Fed says it will carry on with a program investors had nervously been anticipating for months could gradually disappear.
More economic policy twists could come in the weeks ahead, as Mr. Obama squares off with congressional Republicans over a Sept. 30 deadline to pass legislation that funds the government in the coming fiscal year and a mid-October deadline to raise the federal borrowing limit.
Former Presidential Candidate and former Texas Congressman Ron Paul joins the News Hub to react to the Federal Reserve’s decision to continue its bond-buying program, and an impending government shutdown.
Investors seemed to like the prospect of continued easy money from the central bank. Stocks rallied and the Dow Jones Industrial Average closed up 147.21 points, or 0.95%, at a record level of 15676.94. Yields on 10-year Treasury notes, which had risen in recent months in anticipation of a September cutback in the Fed’s bond purchases, dropped to 2.701%.
The bond-buying program, also known as quantitative easing, or QE, was relaunched last year and is meant to stimulate economic growth and hiring by holding down interest rates and encouraging households and businesses to spend and invest. This round of purchases, together with earlier efforts along the same lines, has swelled the Fed’s holdings of securities to nearly $4 trillion.
Mr. Bernanke began signaling in May that, because the job market was gradually improving and because the Fed anticipated faster growth by year-end, the central bank might pull back on the bond-buying program.
After two days of deliberations, however, Fed officials decided Wednesday the economy hadn’t lived up to their expectations for growth. In fact, they lowered their growth estimates for this year and next—and expressed worry that a jump in long-term interest rates over the past several months could squeeze an already weak upturn.
“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” the Fed said in a statement after the meeting. “The [Fed] decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
Fed officials voted to keep short-term interest rates near zero, where they have been pinned since late 2008. Most officials indicated in their latest economic projections they expect to make the first rate increase in 2015 or later.
The Fed’s hesitance to begin winding down the bond-buying program might be the least surprising of all of the latest Washington plot twists. Officials had been wavering about ending the program in the days leading up to the Fed’s two-day meeting, according to their public comments and interviews with officials earlier this month. For many of them, it was always a close call.
Mr. Bernanke on Wednesday flagged the Fed’s new worries about fiscal policy. If Congress doesn’t pass legislation authorizing funding in the fiscal year that starts Oct. 1, a partial government shutdown will ensue. If it doesn’t raise the debt ceiling, the government could start missing payments, including those to military contractors, Social Security recipients and bondholders or others.
“A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy,” Mr. Bernanke said in his press conference following the policy meeting. “The Federal Reserve’s policy is to do whatever we can to keep the economy on course.”
His comments came on a day when House Republicans and the White House dug in on their opposing fiscal positions, raising the odds of a rolling showdown over budget issues in coming weeks.
Fed officials faced several economic conundrums at this week’s gathering. They have long been predicting economic growth would pick up, but so far it has failed to accelerate. In economic projections released by the central bank, officials lowered their estimates for growth this year to slightly more than 2%, a continuation of the anemic growth rate that has prevailed for much of the recovery.
Other indicators of the economy’s vigor have been mixed. Earlier Wednesday, for instance, the Commerce Department said that though home construction picked up in August, builders filed fewer permits for future construction last month, a potential sign of softening demand.
The labor market has been among the most vexing aspects of the economy for Fed officials. Employment growth slowed this summer. Still, the unemployment rate has fallen substantially since the Fed launched its bond-buying program last year—to 7.3% in August from 8.1%. One unwelcome reason for the drop is an exodus of workers from the labor force.
The Fed says it wants a lower unemployment rate, but Mr. Bernanke gave conflicting answers about how meaningful officials find the latest declines. At one point he said the unemployment rate was “perhaps the best single indicator of the state of the labor market.” But he later said “the unemployment rate is not necessarily a great measure in all circumstances of the state of the labor market overall.”
Mr. Bernanke also appeared to back away from a bond-buying marker the Fed had laid down in June. Then, Mr. Bernanke said at a press conference that officials expected the jobless rate to be around 7% when the Fed ended its $85 billion monthly bond buying program. He made no mention of that 7% marker in his statement Wednesday and played it down when asked about it. “There is not any magic number that we are shooting for,” Mr. Bernanke said. “We’re looking for overall improvement in the labor market.”
Amid all of this uncertainty, business leaders aren’t brimming with confidence.
Tom Riordan, chief executive of Neenah Enterprises, one of the largest independent foundry companies in the U.S., said he feels less optimistic than he did a year ago. The economy “looks pretty lethargic,” he said. The firm’s revenue and employment are both down slightly from a year ago, he said, despite the company gaining market share.
The company is a supplier to several major U.S. industries, including shipping, heavy industry and construction—all of which Mr. Riordan described as “very challenged.” Demand has been flat in its biggest market, tractor-trailer trucks, for which it supplies engine blocks, axles, drive trains and other parts.
Reports like this leave investors with the same questions that have nagged at them for much of the past six months. When will the Fed start unwinding its bond buying program? When will it finish it completely? Is the program working, or just loading the central bank up with future risks?
Those questions are compounded by a new one: Who will lead the Fed when Mr. Bernanke’s term is up at the end of January? He declined to talk about his future at the press conference. With Mr. Summers removing himself from contention, Ms. Yellen has become the front-runner. She is a big supporter of using the Fed’s easy-money programs to combat high unemployment.
Mr. Bernanke made clear in his press conference, and the Fed did in its policy statement, that the Fed could still take a step toward ending its bond-buying program before year-end. Mr. Bernanke said the Fed wants more confirmation of a pickup in economic growth, sustained job gains and proof that low inflation is moving back up toward the Fed’s 2% target.
The policy statement indicated a central bank watching carefully for the signs it needs to start pulling back. With so many twists in the economic landscape, Mr. Bernanke isn’t committing to anything. “We are tied to the data,” he said. “We don’t have a fixed calendar schedule.”
When asked if the Fed was confusing investors, the Fed chairman bristled.
“We can’t let market expectations dictate our policy actions,” he said. “Our policy actions have to be determined by our best assessment of what’s needed for the economy.
FOR MORE INFORMATION ON THIS TOPIC CLICK HERE
No comments:
Post a Comment