Econintersect: The Federal Reserve Federal Open Market Committee (FOMC) Meeting ending on 22 June 2011 made no change to its current low interest rate policy and ending QE2.
The FOMC statement alluded to the increase in the inflation rate which they consider as transitory – and professed belief that longer-term inflation expectation remains stable. The FOMC also acknowledged the soft spot in the economy they believe is also transitory.
Repeating from the last meeting, QE2 will be ending at the end of June, but will continue to replace securities as they expire to maintain the balance sheet value. The federal funds rate will remain at 0% to 1/4% “for an extended period.”
NOTE: this article has been revised at 13:49 EST adding a NY Fed statement on the final purchases of QE2 – see the end of this article.
The full meeting statement:
Release Date: June 22, 2011
For immediate release
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
addenda: The NY Fed issued the following after the close of the FOMC meeting minutes:
Statement Regarding Purchases of Treasury Securities
|June 22, 2011|
On June 22, 2011, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk at the Federal Reserve Bank of New York (the Desk) to complete purchases of $600 billion of longer-term Treasury securities by the end of June. The FOMC also directed the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion.
Under the existing reinvestment policy, principal payments from agency debt and agency mortgage-backed securities (MBS) are reinvested in longer-term Treasury securities. In implementing this policy going forward, the Desk will follow operating practices similar to those established during the $600 billion Treasury purchase program.
Purchases will be allocated across maturities according to a distribution that is nearly identical to that executed under the Treasury purchase program. The only change to the distribution is that the two maturity sectors beyond 10 years from the earlier purchase program will be combined into a single maturity sector of 10 to 30 years in order to achieve greater operational simplicity. Specifically, the Desk plans to distribute purchases across seven maturity sectors based on the following approximate weights:
*The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.
**TIPS weights are based on unadjusted par amounts.
The size and frequency of operations will be reduced to levels commensurate with agency debt and MBS principal payments. At this time, the Desk anticipates conducting one operation per month in each maturity sector.
The Desk will continue to release a tentative schedule of purchase operations on or around the eighth business day of each month, with each schedule providing information on the operations expected to take place through the middle of the following month. The next schedule will be released on July 13, 2011.