The US Federal Open Market Committee (FOMC) decided to keep the federal funds rate unchanged at 0.25%. This was in line with market expectations. In addition, the Fed indicated that “to help support the economic recovery” the Committee will keep the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities into longer term Treasury securities. Simply stated, the Fed would use the proceeds from maturing mortgage-backed securities to purchase US government bonds. The Fed will also continue to roll over their holdings of Treasury securities as they mature.
In making the decision the FOMC made the following key comments about the outlook for growth and inflation:
- The pace of recovery in output and employment has slowed in recent months.
- Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
- Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.
- Housing starts remain at a depressed level.
- Measures of underlying inflation have trended lower in recent quarters and, 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 exceptionally low Federal Fund Target rate is expected to be maintained "for an extended period".
It is worth noting that the Kansas City Fed President, Thomas Hoenig, voted against the decision to keep rates at current levels for an extended period of time, arguing that continuing to convey the expectation of exceptionally low levels of the Federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr Hoenig did not believe that keeping the size of the Federal Reserve's holdings of longer-term securities constantly at their current level was required.
The emphasis of the latest FOMC statement suggests that the Fed has become far more concerned about the pace of the economic recovery. This seems a valid concern given the latest economic data. Unfortunately, there is not much more the Fed can do to support the recovery. Currently, a key concern is what would happen to the pace of the recovery when the “Bush tax breaks” expire at the end of the year.
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