WASHINGTON (7/31/13 UPDATED 2:46 p.m. ET)--As expected, the Federal Reserve's policymakers stayed on course with its monetary policy, with no change in the 0.25% targeted funds interest rate and no announcement of a wind-down in its $85 billion-per-month bond assets purchase program. However, they noted the economy was expanding at a "modest" pace--a downgrade from the "moderate" pace last month.
The Federal Open Market Committee (FOMC), which met in its two day meeting Tuesday and today, said after the meeting ended this afternoon that the increase in mortgage rates is a concern and that persistently low inflation was rising.
"Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated," said the FOMC's statement. "Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
The FOMC noted it "expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate. The committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall." Also FOMC noted it "recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."
Many economists expect that the Fed's announcement about tapering off its $85-billion a month bond assets purchase program, known as quantitative easing (QE3), will come after FOMC's next meeting on Sept. 17-18. The FOMC's statement gave no hint of whether that will be the case.
Instead, it "decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month." It is "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction." These actions "should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the statement continued.
FOMC said it is prepared to "increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
The committee also reaffirmed its view "that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."
It will keep the target range for the federal funds at 0% to 0.25% and "currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."
In determining how long to maintain the "accommodative" policy, the FOMC "will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."
Voting for the policy action were: Federal Reserve Chairman Ben S. Bernanke, Vice Chairman William C. Dudley, James Bullard, Elizabeth A. Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric S. Rosengren, Jeremy C. Stein, Daniel K. Tarullo and Janet L. Yellen. Voting against was Esther L. George, who expressed concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
Economists at the Credit Union National Association are reviewing the statement and will provide an analysis of what FOMC's actions mean for credit unions in tomorrow's News Now.