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Ardent Listener
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 Posted - 01/26/2011 : 19:20:59
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(notice the title, double speak)
AT A GLANCE: Fed To Continue Bond Purchases As Economy Improves .
THE NEWS:
Federal Reserve officials on Wednesday unanimously decided to continue buying government bonds to boost the economic recovery, even as they acknowledged that the U.S. economy looks in better shape and three of the four new Federal Open Market Committee members have been critical of the move. It kept the fed-funds rate range unchanged at 0% To 0.25%, and officials reiterated they expect short-term interest rates to stay close to zero for an extended period.
THE DETAILS
At their first policy-setting meeting of 2011, central bank officials voted unanimously to push ahead with the controversial $600 billion bond-purchase plan. The full backing won by Fed Chairman Ben Bernanke could improve the effectiveness of the program by indicating to financial markets that it's likely to be completed. It also strengthens Bernanke's hand as he prepares to update Congress on the central bank's actions to improve the economy.
Fed officials noted some progress in consumer spending in the statement released following their two-day meeting, saying it "picked up late last year." But they still see the economy constrained by high unemployment, slow income growth and tight credit. Employers "remain reluctant to add to payrolls," and the housing sector "continues to be depressed."
Taken together, the improvements weren't strong enough to make the Fed change its course, and officials reiterated they expect short-term interest rates to stay close to zero for an extended period.
Concerning its bond-buying program, it said it would "continue expanding its holdings of securities as announced in November." The Fed has already bought around $200 billion in Treasurys to expand its balance sheet and is scheduled to complete the $600 billion of purchases in June.
The Fed's easy-money policy was opposed by Kansas City Fed President Thomas Hoenig for all of 2010. Three of the four regional Fed presidents who this year get a vote on the FOMC--currently 11 voting members because of a vacancy on the Fed board in Washington--have spoken against the bond buys: Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis. But nobody was prepared to formally oppose the policy Wednesday. Fisher and Plosser worry it could make it harder for the Fed to control inflation, while Kocherlakota has questioned its ability to cut unemployment. At least two officials are likely to dissent later this year if inflation accelerates.
THE MARKETS:
The Fed's continued pledge to support the economy lured some investors into stocks. The Dow Jones Industrial Average vaulted over 12000 for the first time in almost three years, but couldn't hold its ground, closing up 8.25 points at 11985.44.
Other investors cut Treasury bond holdings, fretting the stimulus could generate inflation at a time when consumer prices have surged in many countries. In late-afternoon trading, the benchmark 10-year note was 24/32 lower in price to yield 3.426%. The 30-year bond was 1 21/32 lower to yield 4.595%.
The dollar slipped against the euro after the Fed statement diminished the greenback's appeal to yield-seeking investors. Late Wednesday afternoon, the euro was at $1.3711, up from $1.3682 late Tuesday, according to EBS via CQG. The dollar was at Y82.16, off from Y82.25, and the U.K. pound was at $1.5930, up from $1.5827. The dollar was unchanged at CHF0.9419.
At Wednesday's settlement, the fed-funds futures market priced in a 78% chance for the FOMC to lift the funds rate to 0.5% at its meeting in January of next year. That's down from an 86% chance just before the Fed's announcement, but higher than the 72% chance priced in at Tuesday's settlement.
Also, gold futures got a slight bump after the Fed statement.
WHAT THEY'RE SAYING:
-The statement was "much ado about nothing," said Dan Greenhaus, chief economic strategist at Miller Tabak + Co. "The statement was very much a 'placeholder' of sorts," he says. One key point, though, is the shift of attention from jobless rate--which did not drop for "good" reasons--to labor conditions more generally.
-"Policy makers continue to kick the cans down the road," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. "Some investors simply got out of their long [Treasury] positions."
-"The market is getting increasingly nervous about inflation," said Ward McCarthy, managing director of the fixed income division at Jefferies & Co. in New York. "Market players are concerned that rising commodity prices and an extraordinarily accommodative monetary policy could prove to be an inflationary roostertail."
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Fed To Continue Bond Purchases As Eco
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