The Fed Holds Firm That Economic Recovery Is Improving
by Hiland Doolittle
On Thursday, The Federal Reserve offered a generally favorable assessment of the nation’s economy as the Federal Open Market Committee (FOMC) supported holding the central bank’s interest rates steady in a 9-1 vote. Kansas City Federal Reserve Bank President Thomas Hoeing, who is opposed to the Fed’s sustained exceptionally low interest rate policy, registered the lone vote of dissent.
The FOMC statement lacked assurances about the strength of the recovery, instead offering carefully controlled suggestions of improvement. The pace of the recovery was described as “moderate for a time” and the overall recovery was depicted as “likely to remain weak.”
Addressing the ongoing housing crunch, the body affirmed its commitment to allow the $1.43 trillion program for the purchase of mortgage-backed securities to expire at the end of March. Analysts have expressed fear about the cessation of the program that has bred some stability into a tenuous marketplace. The Fed pulled back from its more positive forecast about inflation saying price growth will likely remain subdued.
The Markets Reacts
The U.S. dollar reacted positively to the Federal Reserve statement pushing the euro below $1.40. Hoenig’s dissenting vote was interpreted as an open door to a tightening of monetary policy. The majority of primary dealers expressed the view that to combat inflation, the Fed would begin to raise rates this year.
After a sharp downturn last week, the equity markets seem to be stabilizing. Federal Reserve Chairman Ben Benanke’s nomination is expected to be voted upon in Congress on Thursday. Equity markets have stumbled as his confirmation has become less certain.
The Federal Reserve issued other definitive statements.
- The economy grew in the 3rd quarter of 2009 and is presumed to have grown more aggressively in the fourth quarter.
- Consumer spending remains subdued.
- The real estate market is showing signs of renewed weakness.
- Several emergency lending programs will be halted as of February 1, 2010.
- Favorable short-term lending to banks will halt in 2010.
- Dollar swapping with foreign central banks will cease on February 1.
On the Street
Traders supported a position that short-term interest rates will increase in the third quarter of 2010. U.S. short-term rate futures turned lower after the FOMC policy release. Expectations are that the Federal Reserve will maintain an “ultra loose” monetary policy into 2011. Futures on federal funds fell to session lows following the FOMC report.
The benchmark 10-year Treasury yield closed at 3.64% or 2 basis points higher than on Tuesday. The yield on 10-year swaps over Treasuries closed at 12.25 basis points, down from session highs of 13.25, but up from the 12.0o on Tuesday.
George Ball, Chairman and CEO of the Sanders Morris Harris Group, drew the following conclusions about the Fed’s two day meeting;
“The most important part of the Fed’s announcement and perhaps the most unsettling for investor’s over the short-term is that they are giving the March end-date to purchases of mortgage-related securities. That will give us a true test of the strength of that vital marketplace, to see if it can stand on its own without being propped up by big brother.”
Tags: 2009 Stimulus Package, Euro, interest rates, Stimulus Plan, US Dollar, US GDP
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
