No new monetary easing initiatives for now


2:00 p.m.

The Federal Reserve Open Market Committee announced today it would continue its existing efforts to boost the U.S. economy, including keeping the federal funds target rate near zero percent "at least through mid-2013."

But the FOMC held off on announcing any new initiatives, perhaps in part because of some positive economic news since its last meeting in September.

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Federal Reserve Chairman Ben Bernanke did express concerns about continued weakness in the job market and European debt crisis, which became more complicated this week with the announcement that Greece may hold a national referendum that could obstruct European attempts at addressing the crisis.

Pausing to take a breath

It was too soon to expect the Federal Reserve to take more actions, considering it unveiled a monetary easing program called Operation Twist just a month and a half ago, says Paul Wachtel, professor of economics at the Stern School of Business at New York University. That program saw the Fed selling short-term bonds in its portfolio and using the proceeds to buy long-term bonds, a process designed to yield lower rates on long-term loans such as mortgages.

"The economic data -- employment, orders, sales, (gross domestic product) -- (look) a little bit better than it looked at the last meeting," Wachtel says. "I think it's too soon for them to back off something like Operation Twist."

Positive economic data, including better-than-expected growth of 2.5 percent in gross domestic product and private-sector jobs growth, seem to have influenced the Fed to stand pat. From the Fed's statement:

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.

The sheer volume of monetary easing by the Fed in recent years also may have been a factor, says Lewis Spellman, professor of finance at University of Texas in Austin.

"The Fed has run out of bullets. Four years ago when we started the mortgage meltdown, its balance sheet was about $900 billion," Spellman says. "It's now three times that."

That balance-sheet expansion has been driven by the Fed's massive purchases of securities in the open market known as quantitative easing, or QE, Spellman says.

More QE to come?

However, the Fed did hint that it would take further action if the U.S. economy showed signs of worsening. That action could take the form of a third round of QE, says Tom Porcelli, chief U.S. economist for RBC Capital Market in New York.

"Twist just started so I think it's premature for the Fed, at this stage, to want to engage in any additional policy easing," Porcelli says. "However, I don't think there's any question that QE is in tow."

Porcelli says a chorus of Fed officials, including Federal Reserve board members Janet Yellen and Daniel Tarullo, have cited the housing market as an impediment to recovery.

"They all seem to be leading us down this path of additional policy measures," he says, culminating in what could be a new round of quantitative easing in early 2012.

Bottom line for consumers

What remains to be seen is how much the Fed's easing efforts will impact consumers. Mortgage borrowers have clearly benefited, as mortgage rates have fallen to record lows since the beginning of Operation Twist. Still, low rates may not be enough to help boost the housing market, Wachtel says.

"The issue is with so many other problems in the mortgage market -- people's difficulty in refinancing, the unwillingness of banks to encourage refinancing, the inability of banks to write down existing mortgages when they're underwater and allow people to refinance to the current value of the house.

"All those kinds of structural and even legal issues are really what ties up the mortgage market," Wachtel says. "The Fed is not involved in any of that."

For savers, the Federal Reserve's continued push for lower interest rates has been a hard pill to swallow. Operation Twist could be particularly hard on investors in long-term certificates of deposit, Wachtel says.

"The Fed is basically buying long-term Treasuries, so the rates should go down. If rates are going down on longer-term Treasuries, then banks' CD rates of longer terms should go down in line with that," he says.

As for the bigger economic picture, some experts doubt the Fed's efforts will have much of a positive effect on consumer spending or overall economic growth.

"We have domestically within our economy too many consumers who are burdened with debt, and monetary policy works by inducing them to go to banks and, with cheaper rates, borrow more and spend more," says Spellman. "But they are already trying to work their debt limits down."

Still, the Fed doesn't want to be seen as sitting on its hands if the U.S. economy slides into a second recession.

"I think it's going to be very difficult for the Fed to jump-start economic activity, and the truth is, they probably recognize that. However, that's not going to stop them from continuing to act," Porcelli says. "The Fed would not want to be accused of sitting idly by while economic activity deteriorates."


12:30 p.m.

The Federal Reserve Open Market Committee today elected not to begin any new monetary easing but did hint at future actions should the economic outlook continue to show weakness.

Fed Chairman Ben Bernanke reiterated his commitment to keeping the federal funds rate target near zero for the foreseeable future, citing concerns about the moribund U.S. economy and the continued debt crisis in Europe.

Federal Reserve watchers hadn't expected much in the way of new initiatives, as this most recent meeting came on the heels of the announcement of an easing program known as Operation Twist announced at the Sept. 21 meeting of the FOMC. That program seeks to bring down rates on long-term loans such as consumer mortgages by selling some of the Fed's short-term bond portfolio and use the proceeds to purchase long-term bonds such as mortgage-backed securities and long-term corporate bonds.

"The economic data -- employment, orders, sales, (gross domestic product) -- (look) a little bit better than it looked at the last meeting," says Paul Wachtel, professor of economics at the Stern School of Business at New York University. "I think it's too soon for them to back off something like Operation Twist."

Some positive data had also begun to emerge in the run-up to the meeting, including a better-than-expected 2.5 percent GDP growth and a gain of 110,000 private sector jobs in ADP's National Employment Report for October. That positive data may have pushed the Fed to stand pat for now.

Fed day coverage

Nov. 2, 2011

The Federal Reserve's rate-setting committee meets this week, a two-day affair on Tuesday and Wednesday, culminating in the third press conference scheduled for this year.

Unlike the September meeting in which nearly all the Fed-watching wonks were certain the Federal Open Market Committee, or FOMC, would embark on Operation Twist, the expected outcome of this month's meeting is still something of a question mark.

One thing is certain: The federal funds target rate will remain close to zero. That means rock-bottom rates on loans for those who can get them and bottom-of-the-barrel yields on savings for everyone.

Brass tacks

With the economic tea leaves pointing in a positive direction on some fronts and two consecutive meetings in which significant monetary policy action was taken, the FOMC is most likely to take a wait-and-see approach at this meeting.

In fact, with the release of the third-quarter gross domestic product on Thursday of the preceding week, the Fed may find the soft patches in the economy a bit firmer than they seemed at the September meeting.

"I think there has been a change in the economic landscape with the release of the third quarter GDP. It was 2.5 percent, almost double the previous quarter, the best result in one year. I think this will give the opportunity to the Fed to pause and basically buy some more time," says Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

Of course, the economy is still plagued by multiple problems, notably housing and unemployment.


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