VOL. 127 | NO. 209 | Thursday, October 25, 2012
Fed Cites Moderate US Growth, Takes no new Action
MARTIN CRUTSINGER | AP Economics Writer
WASHINGTON (AP) — Two weeks before a U.S. election focused on the economy, the Federal Reserve said Wednesday that its help is still needed to increase growth and lower unemployment.
The Fed took no action after a two-day policy meeting. It wants time to assess whether the aggressive steps it launched in September will help the economy.
Last month, the Fed began buying mortgage bonds to try to push long-term interest rates lower and make home buying more affordable. It also said it planned to keep its benchmark short-term rate near zero through mid-2015.
In a statement Wednesday, the Fed said the U.S. economy is improving moderately. But it said job growth has been slow and the unemployment rate remains elevated.
It noted that consumer spending has strengthened slightly and that housing has shown further signs of improvement. Growth in business investment has slowed, though.
The Fed said inflation has recently risen slightly because of higher energy prices. But it said inflation over the long run should remain mild.
The Fed's statement was largely expected, and it didn't move stock or bond prices.
"After the big changes in September and the presidential election less than two weeks away, officials were probably happy to make this week's meeting as much of a non-event for markets as possible," said Jim O'Sullivan, chief U.S. economist for High Frequency Economics.
The statement was approved on an 11-1 vote. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, objected for the seventh consecutive meeting. Lacker has been concerned that the Fed's policy steps could lead to higher inflation.
The unemployment rate fell in September to 7.8 percent, the first time it's been below 8 percent since January 2009. But the economy is still growing too slowly to accelerate job growth.
The economy grew at a meager 1.3 percent annual rate in the April-June quarter. Economists think it grew slightly faster in the July-September quarter. The government will report its first estimate of third-quarter growth on Friday.
Still, many employers remain wary of hiring, in part because of tax increases and spending cuts set to kick in next year and also because of a slowing global economy.
The bond purchases the Fed launched last month are designed to lower interest rates and cause stock and home prices to rise, creating a "wealth effect." When consumers feel wealthier, they're typically more willing to spend, thereby boosting the economy.
Fed officials reiterated Wednesday that they intend to hold rates low even after the economic recovery has strengthened. That's a signal that the Fed will keep intervening until the economy grows fast enough to reduce unemployment sharply.
Critics note that interest rates have already been at or near all-time lows. They worry that the Fed's injection of steadily more money into the financial system will eventually ignite inflation or create dangerous bubbles in the prices of stocks or other assets.
Since the Fed unveiled its latest plans last month, the average rate on a 30-year fixed mortgage has touched 3.36 percent — the lowest since mortgage buyer Freddie Mac began keeping records in 1971. Cheap loans have helped lift home sales, prices and construction — key pillars of the housing market's gradual but steady comeback.
Some analysts say they expect the Fed to take action at its next meeting, Dec. 11-12. That's because one Fed program that's intended to keep long-term borrowing rates down will expire at year's end. The program is called "Operation Twist."
Under Operation Twist, the Fed has been selling short-term securities and using the proceeds to buy longer-term securities.
When Operation Twist expires, the central bank will run out of short-term investments to sell. Economists think the Fed will announce in December that it will replace Twist with another program to buy longer-term Treasurys.
The Fed will be especially concerned in December if Congress has failed to reach a budget deal by then. The lack of a budget agreement could send the government over a "fiscal cliff," with sharp tax increases and spending cuts taking effect in January.
"The uncertainty surrounding the direction of fiscal policy is likely to be at its peak around the time of the (Fed's) December meeting," said Paul Ashworth, chief U.S. economist at Capital Economics. "The Fed might feel the need to loosen monetary policy even more."
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