The Federal Reserve signaled the end of its controversial $600 billion bond buying program as planned, setting the stage for challenging decisions about whether to raise interest rates in the face of both high unemployment and looming threats of inflation.
The end of the Treasury buying program - which the Fed put in place in November to ease financial conditions - had been telegraphed by the U.S. central bank and the Fed made it a near certainty by saying in a statement at the end of a two day meeting that it "will complete" the purchases by the end of June.
That effectively marks the end of an unprecedented easing cycle, in which the Fed has pushed short-term interest rates to near zero and purchased more than $2 trillion of Treasury and mortgage bonds, flooding the economy with cash.
The big drama of the day still awaits. At 2:15 pm ET, Fed Chairman Ben Bernanke will hold the Fed's first ever post-meeting press conference, in which he will elaborate on how the decision making Federal Open Market Committee viewed the economy and policy decisions over two days of discussions. Fed policies have drawn increasing fire in recent years from U.S. lawmakers and foreign officials, and Bernanke has responded by stepping up his opportunities to explain the policies and counter the criticism.
The choice about when to raise interest rates is going to be challenging. The economy appeared to stumble in the first quarter. The Commerce Department is expected to report Thursday that it grew at a subpar rate of less than 2% between January and March. But with commodities prices marching higher, the Fed is under increasing pressure to respond to inflation threats with higher rates.
The Fed is holding the line on interest rates even as other central banks - most notably the European Central Bank and those in emerging markets - push theirs higher.
For now, Fed officials appear to be in no hurry to follow the tightening trend. In the statement, officials reiterated they expect short-term rates to stay at a record low for an "extended period" and said they plan to keep the size of the Fed's more than $2.0 trillion balance sheet steady by reinvesting the proceeds when bonds in its large portfolio mature.
Their description of the economy was little changed from the way they characterized it when they last met in March. The nearly two-year-old economic recovery is "proceeding at a moderate pace" and the jobs market is improving gradually, the statement said. After their March 15 meeting, officials described the recovery as being on "firmer footing." While consumer spending and business investment continue to expand, the housing sector is still "depressed."
As they have done before, Fed officials acknowledged that higher prices for oil, grain, cotton and other commodities were putting upward pressure on inflation. But since most officials, including Bernanke and his top lieutenants, expect the effects on consumer prices to be temporary - as was the case following in oil price spike in 2008 -- they don't see a longer-term threat to inflation.
Measures of expected inflation in the bond market and in consumer surveys have recently been creeping up toward the high end of the range they've been in for several years. The concern is that, if people expect inflation to go up in the future, it could become a self-fulfilling prophecy. But Fed officials don't see that happening.
"Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," officials said.
Analysts said the Fed is holding the status quo. "Nothing indicates they've changed their views on anything," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. "If anything is going to be signaled to markets, it is going to come from the press conference."
When Bernanke starts speaking at 2:15 p.m. ET, the first of a series of news conference that are now planned every three months, the Fed will also release updated forecasts for growth, unemployment and inflation. Many private forecasters have been revising down their 2011 economic growth forecasts in the last few weeks in face of disappointing first quarter data. They've also been revising up their inflation forecasts. The Fed seems likely to follow suit.
One area that is ripe for debate inside the Fed is the 2012 growth outlook. In January, Fed officials projected the economy would grow 3.5% to 4.4% next year. That's more optimistic than the consensus among private analysts, who see growth next year of 3.2%, according to the April issue of Blue Chip Economic Indicators, a compilation of consensus forecasts. The risk of disappointing growth makes it hard for the Fed to decide to raise rates.
The Fed's bond purchases were first announced in November 2008, one of many untested attempts by the central bank to fight back the debilitating consequences of the worsening financial crisis. It ramped up the program in March 2009, allowed it to expire, and then resumed it last November when the economy appeared to lose momentum.
Fed officials for the most part believe the multiple rounds of purchases - which is known in many quarters as quantitative easing, or QE - helped to ease financial conditions, lift the economy and fight off the threat of deflation. The latest round was accompanied by a soaring stock market and falling unemployment. But critics blame QE for fueling the surge in global commodity prices and sowing the seeds of inflation in the U.S.
The critics include some regional Fed bank presidents. Divisions have already surfaced within the Fed on the right response to higher commodity prices, with a vocal minority of regional officials urging tighter credit this year to head off building inflation. Charles Plosser from the Philadelphia Fed and Richard Fisher from the Dallas Fed have been the most outspoken in warning about the dangers of raising rates too late. But they didn't dissent at the latest FOMC meeting.
The European Central Bank, which looks more closely at inflation measures including food and energy that have shown prices rising above its 2.0% target, raised its key policy rate to 1.25% April 7. The ECB is more concerned about so-called second-round effects, when higher commodity prices prompt companies to pass on higher costs and consumers to demand higher wages. More ECB rate increases are likely as early as June.
"The ECB seemingly has wanted to be more pre-emptive on second round effects, while the Fed appears to be more reactive, preferring to wait for evidence of second-round effects," said Donald Kohn, Fed Vice Chairman until last year. "I can see the rationale for being reactive-waiting for possible problems to emerge--when unemployment is close to 9.0%"
The end of the Treasury buying program - which the Fed put in place in November to ease financial conditions - had been telegraphed by the U.S. central bank and the Fed made it a near certainty by saying in a statement at the end of a two day meeting that it "will complete" the purchases by the end of June.
That effectively marks the end of an unprecedented easing cycle, in which the Fed has pushed short-term interest rates to near zero and purchased more than $2 trillion of Treasury and mortgage bonds, flooding the economy with cash.
The big drama of the day still awaits. At 2:15 pm ET, Fed Chairman Ben Bernanke will hold the Fed's first ever post-meeting press conference, in which he will elaborate on how the decision making Federal Open Market Committee viewed the economy and policy decisions over two days of discussions. Fed policies have drawn increasing fire in recent years from U.S. lawmakers and foreign officials, and Bernanke has responded by stepping up his opportunities to explain the policies and counter the criticism.
The choice about when to raise interest rates is going to be challenging. The economy appeared to stumble in the first quarter. The Commerce Department is expected to report Thursday that it grew at a subpar rate of less than 2% between January and March. But with commodities prices marching higher, the Fed is under increasing pressure to respond to inflation threats with higher rates.
The Fed is holding the line on interest rates even as other central banks - most notably the European Central Bank and those in emerging markets - push theirs higher.
For now, Fed officials appear to be in no hurry to follow the tightening trend. In the statement, officials reiterated they expect short-term rates to stay at a record low for an "extended period" and said they plan to keep the size of the Fed's more than $2.0 trillion balance sheet steady by reinvesting the proceeds when bonds in its large portfolio mature.
Their description of the economy was little changed from the way they characterized it when they last met in March. The nearly two-year-old economic recovery is "proceeding at a moderate pace" and the jobs market is improving gradually, the statement said. After their March 15 meeting, officials described the recovery as being on "firmer footing." While consumer spending and business investment continue to expand, the housing sector is still "depressed."
As they have done before, Fed officials acknowledged that higher prices for oil, grain, cotton and other commodities were putting upward pressure on inflation. But since most officials, including Bernanke and his top lieutenants, expect the effects on consumer prices to be temporary - as was the case following in oil price spike in 2008 -- they don't see a longer-term threat to inflation.
Measures of expected inflation in the bond market and in consumer surveys have recently been creeping up toward the high end of the range they've been in for several years. The concern is that, if people expect inflation to go up in the future, it could become a self-fulfilling prophecy. But Fed officials don't see that happening.
"Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," officials said.
Analysts said the Fed is holding the status quo. "Nothing indicates they've changed their views on anything," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. "If anything is going to be signaled to markets, it is going to come from the press conference."
When Bernanke starts speaking at 2:15 p.m. ET, the first of a series of news conference that are now planned every three months, the Fed will also release updated forecasts for growth, unemployment and inflation. Many private forecasters have been revising down their 2011 economic growth forecasts in the last few weeks in face of disappointing first quarter data. They've also been revising up their inflation forecasts. The Fed seems likely to follow suit.
One area that is ripe for debate inside the Fed is the 2012 growth outlook. In January, Fed officials projected the economy would grow 3.5% to 4.4% next year. That's more optimistic than the consensus among private analysts, who see growth next year of 3.2%, according to the April issue of Blue Chip Economic Indicators, a compilation of consensus forecasts. The risk of disappointing growth makes it hard for the Fed to decide to raise rates.
The Fed's bond purchases were first announced in November 2008, one of many untested attempts by the central bank to fight back the debilitating consequences of the worsening financial crisis. It ramped up the program in March 2009, allowed it to expire, and then resumed it last November when the economy appeared to lose momentum.
Fed officials for the most part believe the multiple rounds of purchases - which is known in many quarters as quantitative easing, or QE - helped to ease financial conditions, lift the economy and fight off the threat of deflation. The latest round was accompanied by a soaring stock market and falling unemployment. But critics blame QE for fueling the surge in global commodity prices and sowing the seeds of inflation in the U.S.
The critics include some regional Fed bank presidents. Divisions have already surfaced within the Fed on the right response to higher commodity prices, with a vocal minority of regional officials urging tighter credit this year to head off building inflation. Charles Plosser from the Philadelphia Fed and Richard Fisher from the Dallas Fed have been the most outspoken in warning about the dangers of raising rates too late. But they didn't dissent at the latest FOMC meeting.
The European Central Bank, which looks more closely at inflation measures including food and energy that have shown prices rising above its 2.0% target, raised its key policy rate to 1.25% April 7. The ECB is more concerned about so-called second-round effects, when higher commodity prices prompt companies to pass on higher costs and consumers to demand higher wages. More ECB rate increases are likely as early as June.
