Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
The comments on the economy were slightly more negative than last meeting. The Fed noted the financial issues in Europe, and also commented that “underlying inflation has trended lower”. Each statements was slightly less positive …
Annie Lowrey at The Washington Independent:
Except that this month, the FOMC says that the economy is improving “gradually,” rather than just improving. Last month, financial conditions remained supportive of growth; this month, less so. This month, the FOMC notes that underlying inflation is declining — for the past two months, there has technically been price deflation. All in all, not a particularly comforting message.
Sudeep Reddy at Wall Street Journal:
Four meetings, four dissents. Federal Reserve Bank of Kansas City President Thomas Hoenig kept his dissent streak going strong at today’s Federal Open Market Committee meeting. Given the rest of the FOMC’s stance — displaying more caution about the strength of the recovery — this probably won’t be Mr. Hoenig’s last dissent of the year.
Mr. Hoenig was the lone opposing vote in the FOMC’s 9-1 decision to keep the federal funds rate near zero with the guidance that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The FOMC’s post-meeting statement repeated Mr. Hoenig’s rationale offered in the April statement: “continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.” Anyone looking closely for new language from Mr. Hoenig was met with only one slight alteration from the April statement: an added hyphen between “longer run” that was missing on April 28.
For months, Mr. Hoenig has warned about the potential for near-zero interest rates to create imbalances — that is, bubbles — and spur inflation in the longer run. In a June 3 speech, he again called monetary policy “a blunt instrument that has a wide set of intended but also unintended consequences that can and have worsened economic outcomes including misallocation of precious resources, inflation and long-term unemployment.” He added, “That is why we want to return to a sustainable long-term equilibrium policy rate, starting soon.”
Daniel Indiviglio at The Atlantic:
By now, many people expected that we would have a more concrete blueprint of when the Fed’s exit strategy will begin. When might it begin raising rates? When will it begin selling the assets it accumulated during the financial crisis? We won’t know the answers to these questions as soon as we thought, because the problems in Europe have made the Fed wary about scaring the market with signs of tightening.
As for rates, the Fed continues to assure banks that they will remain “exceptionally low” for “an extended period.” Kansas City Federal Reserve President Thomas M. Hoenig remains the lone dissenter. He believes that this language should be weakened so the central bank can feel more flexibility to raise rates quickly if inflation suddenly manifests itself.
Of course, at this time, inflation is very low. It appears to be well under control, which makes it unsurprising that the Fed wouldn’t feel the need to provide greater certainty on when it might raise rates by changing its language. As the statement noted, energy prices are actually deflationary.
David Leonhardt at the New York Times:
Mr. Bernanke also believes that the economy is growing “not fast enough,” as he recently put it. He has predicted that unemployment will remain high for years and that “a lot of people are going to be under financial stress.”
Yet he has been unwilling to use his power to lift growth and reduce joblessness from near a 27-year high. Instead, Fed officials are expected to announce on Wednesday that they have left their policy unchanged, even if they acknowledge that the economy has recently weakened.
How can this be? How can Mr. Bernanke simultaneously think that growth is too slow and that it shouldn’t be sped up? There is an answer — whether or not you find it persuasive.
Above all, top Fed officials are worried that financial markets are fragile. They are not so much worried about inflation, the traditional source of Fed angst, as they are about upsetting the markets’ confidence in Washington. Yes, investors remain happy to lend the United States money at rock-bottom interest rates, despite our budget deficit and all of the emergency Fed programs that will eventually need to be unwound. But no one knows how long that confidence will last.
In effect, Mr. Bernanke and his colleagues have decided to accept an all-but-certain downside — high unemployment, for years to come — rather than risk an even worse situation — a market panic, a spike in long-term interest rates and yet higher unemployment. As the last few years have shown, market sentiment can change unexpectedly and sharply.
Still, you have to wonder if the Fed is paying enough attention to the risks of its own approach. They do exist. The recent data on jobless claims, consumer spending and home sales have been weak. On Tuesday, Britain announced a budget-cutting plan that will depress short-term growth there and spill over somewhat into the global economy. The necessary budget cuts in Greece and other parts of Europe won’t help global growth, either.
The main historical lesson of financial crises is that governments are usually too passive. They respond in dribs and drabs, as Japan did in the 1990s and Europe did in 2008. Or they remove support too quickly, as Franklin Roosevelt did in 1937, and then the economy struggles to escape its funk.
In today’s Federal Reserve Open Market Committee release America’s monetary policymakers said that an already bad economic outlook now looks worse, as “[f]inancial conditions have become less supportive of economic growth on balance” and that “the pace of economic recovery is likely to be moderate for a time” and “[w]ith substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.” That ought to be a recipe for looser monetary policy, but instead the Fed chose to hold pat. Every time I mention the view that more expansionary monetary, some people chime in with the view that monetary policy can’t be made to work under the current conditions. That may be true, though I don’t personally believe it. But it’s important for people to understand that whatever you think about this question Ben Bernanke himself has never adhered to this view.
David Leonhardt has an excellent column today teeing off that point and making the case for looser policy. I might add that this is hardly the first excellent Leonhardt column of the recession years, and it strikes me as a shame for the NYT to be semi-hiding one of their best columnists in the business section. In a time of economic crisis at least, insightful economic policy writing is a huge part of general interest political commentary.