By Joshua Zumbrun - Sep 14, 2012 1:33 AM GMT+0400
The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.
“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”
Ben S. Bernanke, chairman of the U.S. Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., on Sept. 13, 2012. Photographer: Andrew Harrer/Bloomberg
Sept. 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about the central bank's asset purchases and the U.S. economy. He speaks at a news conference in Washington after a meeting of the Federal Open Market Committee. (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Former Federal Reserve Vice Chairman Alan Blinder, now a Princeton University economist, Allan Meltzer, a professor at Carnegie Mellon University, John Taylor, an economics professor at Stanford University, and Kevin Warsh, a former Fed governor, participate in a panel discussion about the potential implications of Fed monetary policy. Bloomberg's Rich Miller moderates the panel at the Bloomberg Markets 50 Summit in New York. (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Abby Joseph Cohen, a partner and strategist at Goldman Sachs Group Inc., Steven Einhorn, vice chairman of Omega Advisors Inc., Jean-Marie Eveillard, senior adviser for First Eagle Investment Management, and Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., talk about the Federal Reserve's decision to undertake a third round of quantitative easing today, the outlook for financial markets and investment strategy. Bloomberg’s Dominic Chu moderates the panel at the Bloomberg Markets 50 Summit in New York. (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs Group Inc., talks about the Federal Reserve’s decision to undertake a third round of quantitative easing and the impact of threatened federal budget cuts on U.S. financial markets. She speaks with Trish Regan and Adam Johnson on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Former Federal Reserve Vice Chairman Alan Blinder, now a Princeton University economist, talks about today's decision by the Federal Reserve to undertake another round of quantitative easing. The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month as it seeks to boost growth and reduce unemployment. He speaks with Trish Regan on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, talks about the Federal Reserve's decision to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month. (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, talks about the Federal Reserve's decision to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month. He speaks with Julie Hyman on Bloomberg Television's "Lunch Money." (Source: Bloomberg)
Sept. 13 (Bloomberg) -- The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a bid to boost growth and reduce unemployment. The central bank's Federal Open Market Committee said it would likely hold the federal funds rate near zero “at least through mid-2015.” Hans Nichols and Michael McKee report on Bloomberg Television's "Lunch Money." (Source: Bloomberg)
Sept. 13 (Bloomberg) -- Federated Investors Steve Auth reacts to the Federal Reserve decision to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month. He speaks on Bloomberg Television's "Lunch Money." (Source: Bloomberg)
Ben S. Bernanke, chairman of the U.S. Federal Reserve, in Washington, D.C. Photographer: Joshua Roberts/Bloomberg
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Stocks jumped, sending benchmark indexes to the highest levels since 2007, and gold climbed as the Fed said it will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”
Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he called a “grave concern.” The decision immediately provoked a renewed backlash from Republicans, including Senator Bob Corker of Tennessee, who said Bernanke’s policies damage the Fed’s credibility while doing little to spur the economy.
The FOMC also said it would probably hold the federal fundsrate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
Stocks Rally
The Standard & Poor’s 500 Index jumped 1.6 percent to 1,459.99 at the close of trading in New York. Oil climbed 1.3 percent to $98.31 a barrel, a four-month high, while gold jumped to the highest price since February.
“This is definitely a significant shift in FOMC policy,” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist. “This is a very aggressive commitment to success on its mandates.”
Bernanke said the open-ended purchases would continue until the labor market improved significantly. “We’re not going to rush to begin to tighten policy,” he said. “We’re going to give it some time to make sure that the economy is well established.”
Price Stability
While the U.S. has “enjoyed broad price stability” since the mid-1990s, Bernanke said, “the weak job market should concern every American.”
Bernanke said the open-ended purchases of securities should help bolster the confidence of American consumers and businesses by showing that the central bank is determined to stop the economy from weakening.
“By assuring the public that we will be prepared to take action if the economy falters, we’re hopeful that that will increase confidence, make people more willing to invest, hire, and spend,” Bernanke said.
Purchases of housing debt should help the housing market, which he called “one of the missing pistons in the engine.”
“Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing,” he said.
Housing Debt
The market for housing debt bore him out as mortgage-bond yields tumbled to unprecedented lows, signaling home-loan rates may fall to new records.
Yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value declined 18 basis points to 2.18 percent as of 3:05 p.m. in New York, according to data compiled by Bloomberg. The gap with an average of five- and 10-year Treasury rates narrowed 16 basis points to about 98 basis points, or the lowest since 1992.
The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.
Richmond Fed President Jeffrey Lacker dissented for the sixth consecutive meeting, saying he opposed additional asset purchases. Lacker opposed the FOMC’s June decision to extend Operation Twist through the end of the year and has said he expects interest rates will need to be raised in 2013.
Jackson Hole
Today’s Fed meeting comes less than two weeks after Bernanke’s Aug. 31 speech in Jackson Hole, Wyoming, when he lamented the state of the labor market and defended his “nontraditional policies,” saying “the costs, when considered carefully, appear manageable.”
Weak employment data has increased pressure on the central bank to act. The Labor Department said Sept. 7 that the economy added 96,000 jobs in August, less than forecast by economists and down from a 141,000 increase in July. Average hourly earnings were little changed, and 368,000 Americans left the labor force.
Economic growth slowed to a 1.7 percent annual pace in the second quarter from 4.1 percent in the final three months of last year.
“The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” today’s statement said.
Economic Forecasts
In its economic forecasts released today, policy makers said the job-market will improve more swiftly by 2014, with unemployment forecast to fall to 6.7 percent to 7.3 percent, compared with 7 percent to 7.7 percent in their June projections. In 2015, unemployment will fall to 6 percent to 6.8 percent.
Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts. The so- called central tendency forecasts exclude the three highest and three lowest of 19 estimates.
Bernanke, a scholar of the Great Depression, has deployed the most aggressive monetary policies since the Fed’s founding nearly a century ago as he battled the 2007-2009 financial crisis, helped pull the nation out of the worst recession since the 1930s and then sought to keep the expansion going.
Target Rate
The Fed lowered its target interest rate to zero in December 2008 and undertook two rounds of large-scale asset purchases that swelled its balance sheet to almost $3 trillion from less than $900 billion in December 2007, when the recession began.
Unlike the first and second rounds of quantitative easing, today’s program has no end date, and Bernanke declined to provide specific estimates of what economic conditions would prompt the Fed to act or how long the purchases might last.
Republican lawmakers criticized the Fed’s action, with Tennessee’s Corker saying in a statement that Bernanke is “beginning to do serious damage to the Fed as an institution.”
“Open-ended purchases of mortgage-backed securities will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy’s long-term growth prospects,” Corker said.
Republican presidential candidate Mitt Romney said today’s Fed decision reflected what he described as President Barack Obama’s failure to revive the economy. He repeated his calls to replace Bernanke when the chairman’s term expires in January 2014.
Printing Money
“The president’s saying the economy’s making progress, coming back,” Romney said in an interview with ABC News. “Bernanke’s saying, ‘No, it’s not. I’ve got to print more money.” He added that “I think printing more money, at this point, comes at a higher cost than the benefit it’s going to create.”
Bernanke said today that the central bank didn’t take into account the November presidential and congressional elections in its decisions.
“We have tried very hard to be non-partisan and apolitical,” Bernanke said. “We make our decisions entirely on the state of the economy.”
Bernanke’s policies have also raised doubts within the central bank. Fed district bank presidents, including Richmond’s Lacker, Philadelphia’sCharles Plosser and Dennis Lockhart of Atlanta, have also raised concerns about inflation or whether more Fed action would help fuel growth.
Fed Study
Bernanke, in his Jackson Hole speech, cited a Fed study showing that large-scale asset purchases may have raised the level of economic output by almost 3 percent and boosted private payroll employment by more than 2 million jobs.
Bernanke repeated in his press conference that monetary policy is “not a panacea.”
The U.S. economy is vulnerable to the so-called fiscal cliff, the $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress acts. TheCongressional Budget Office said in an Aug. 22 economic report that fiscal tightening of that magnitude could cause a recession.
“We’ve got a U.S. economy where we have looming tax increases that are quite significant, we have looming spending cuts in the government which are quite significant,” Michael DeWalt, the director of investor relations for Peoria, Illinois- based Caterpillar Inc., said in a Sept. 6 presentation. A lot of customers are “unsure about what to do, highly uncertain about where it’s going to go at the end of the year.”
To contact the reporter on this story: Joshua Zumbrun in Washington atjzumbrun@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
