The Federal Reserve, acknowledging the economy has continued to deteriorate, signaled Wednesday that it will keep using unconventional tools to cushion the fallout, including keeping a key interest rate at a record low for quite “some time.”
Specifically, the Fed said it is “prepared” to buy longer-term Treasury securities if the circumstances warrant such action. At its December meeting, the Fed said it was merely evaluating that option.
The Fed agreed — with one dissent — to keep the targeted range for the federal funds rate between zero and 0.25 percent. The funds rate is the interest banks charge each other on overnight loans. Economists predict the Fed will leave rates at that range through the rest of this year.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, was the sole dissenter. He wanted the Fed to move forward on buying Treasury securities.
“The economy has weakened further,” the Fed said. To provide support, it said it would keep rates at rock bottom levels for “some time.”
Having taken the unprecedented step of slashing its key rate to record lows at its previous meeting in December, the central bank pledged anew to look to other unconventional ways to revive the economy.
Fed Chairman Ben Bernanke and his colleagues are battling a three-headed economic monster: crises in housing, credit and financial markets that — taken togheter— haven’t been seen since the 1930s.
Despite the Fed’s aggressive rate-cutting campaign, a string of bold Fed programs and a $700 billion financial bailout program run by the Treasury Department, credit and financial markets are still stressed and far from normal.
Yet, the Fed said there’s been some thawing of frozen credit conditions.
“Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight,” the Fed said.
The central bank said it will be launching a program aimed at bolstering the availability of consumer loans.
Under the program, which is expected to start in February, up to $200 billion will be made available to spur auto, student and credit card loans as well as loans to small businesses. To do that, the Fed will buy securities backed by those different types of consumer debt. The Fed also hopes that action will lower rates on those loans.
The Fed said it will assess whether the program should be expanded in size or scope. Fed officials previously have mentioned the possibility of expanding the program to provide financing for other types of securities, such as those backed by commercial mortgages.
The central bank on Wednesday repeated its pledge to “employ all available tools” to turn the economy around. Since its last meeting in December, the Fed said the economy had lost even more traction.
“Industrial production, housing starts and employment have continued to decline steeply as consumers and businesses have cut back spending,” the Fed said. “Furthermore, global demands appears to be slowing significantly.”
Looking ahead, the Fed anticipates “a gradual recovery in economic activity will begin later this year,” but cautioned that “the downside risks to that outlook are significant.”
Warning that the nation is at a “perilous moment,” President Barack Obama made a fresh plea to Congress Wednesday to enact a $825 billion package of increased government spending and tax cuts to stimulate the economy.
The recession, now in its second year, could turn out to be the longest since World War II.
The nation’s unemployment rate bolted to a 16-year high of 7.2 percent in December and could hit 10 percent or higher at the end of this year or early next year. A staggering 2.6 million jobs were lost last year, the most since 1945, though the labor force has grown significantly since then. Another 2 million or more jobs will vanish this year, economists predict.
This week alone, tens of thousands of new layoffs were announced by companies including Boeing Co., Pfizer Inc., Caterpillar Inc., Home Depot Inc., Target Corp., Corning Inc. and Ashland Inc.
Meanwhile, consumer prices have been falling. At first that seems like a blessing for shoppers, but it if spreads to wages and already stricken prices for homes, stocks and other things for a long time, it could wreak more havoc on the economy. The country’s last serious bout of “deflation” was in the 1930s. Holding rates at record lows would help fend off any deflation risks.
Against that backdrop, the Fed raised the specter of deflation — but didn’t use the word. The Fed saw a risk that “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”
With jobs disappearing, home values tanking, foreclosures soaring and nest eggs shriveling, consumers have sharply cut spending. That, along with the housing collapse, has played a big role in causing the economy’s backslide.
Many economists predict data will show the economy contracted at a pace of 5.4 percent in the final three months of last year when the government releases the gross domestic product report Friday. If they are correct, that would mark the worst performance since a drop of 6.4 percent in the first quarter of 1982, when the country was suffering through a severe recession. The economy is still contracting now — at a pace of around 4 percent, according to some projections.
Full text of the Fed statement
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.
The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve 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; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.