www.CUNA.org/newsnow  WASHINGTON (9/22/11)  The Federal Open Market Committee (FOMC) decided at its meeting this week to purchase billions in Treasury securities and leave the target range for the federal funds rate at 0% to 0.25%.

 

Information received since the FOMC met in August indicates that economic growth remains slow.  Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.  Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased.

 

Investment in non-residential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Inflation appears to have moderated since earlier in the year, as prices of energy and some commodities have declined from their peaks.  Longer-term inflation expectations have remained stable.

 

The committee, which seeks to foster maximum employment and price stability, continues to expect some pickup in the pace of recovery over coming quarters, but anticipates that the unemployment rate will decline only gradually toward levels that the committee judges to be consistent with its dual mandate.  Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. 

 

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the committee decided Wednesday to extend the average maturity of its holdings of securities.  The committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of six years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of three years or less.

 

"Despite political resistance to additional monetary policy, the Federal Reserve chose to go bold with a $400 billion 'operation twist' whereby they will sell $400 billion of short-term Treasury notes -- less than a three-year maturity -- and buy $400 billion of six-to-30 year notes and bonds through June 2012," Steve Rick, Credit Union National Association (CUNA) senior economist, told News Now.

 

 

"This is an attempt to 'twist' the yield curve by lowering long-term market interest rates," he added.  "This will extend the average maturity of the Fed's security holdings and expose them to greater interest rate risk.  The Fed hopes the lower interest rates will increase investment and consumer spending to jump start a stagnant recovery."

 

This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, the committee said.  The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

 

"The Fed also decided to reinvest their maturing agency debt to reduce mortgage interest rates further, in an attempt to stimulate a weakening housing sector,' Rick said.  "Over the past couple of months, mortgages rates have not come down as fast as the 10-year Treasury interest rate.  However, the housing market faces significant headwinds in the form of falling home price expectations among households, weak job growth and falling consumer confidence."

 

The FOMC decided to keep the target range for the federal funds rate at 0% to 0.25% and currently anticipates that economic conditions -- including low rates of resource use and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.