Federal Reserve officials signaled they’ll probably push ahead with unprecedented stimulus until the recovery strengthens and many of the 15 million unemployed Americans find work.
The jobless rate hasn’t fallen below 9.4 per cent since May 2009 and will probably average that figure this year. Unemployment probably declined to 9.7 per cent last month from 9.8 per cent in November, according to the average estimate of a Bloomberg poll prior to a Labor Department employment report on January 7.
While growth has picked up since the Fed announced plans on November 3 to buy $600 billion of bonds, policy makers remain focused on their failure to achieve their goals of full employment and an inflation rate of about 2 per cent, according to the minutes of their December 14 meeting released yesterday. The recovery’s pace is likely to “remain modest, with unemployment and inflation deviating from the committee’s objectives for some time,” the minutes said.
“Right now it looks like the unemployment rate is the whole ball of wax,” said Ward McCarthy, chief financial economist at Jefferies & Co in New York. “The majority just wants to keep going full throttle, and keep policy as accommodative as possible.”
The Fed’s decision to embark on a second round of bond purchases in November, known as quantitative easing and dubbed QE2, sparked some of the bitterest political criticism in three decades. Republican lawmakers and officials in China, Germany and Brazil have said it may weaken the dollar and ignite inflation.
Record easing
As stocks rise and the economy shows signs of improving, Chairman Ben S. Bernanke and his colleagues are trying to explain their record easing to investors expecting a pullback. The Fed chief defended the central bank’s actions in an interview last month on CBS Corp’s “60 Minutes” and Janet Yellen, the central bank’s vice-chair, is leading a subcommittee to review communication strategy.
US central bankers, while affirming their commitment to the asset-purchase program, acknowledged “the communications challenges faced in conducting effective policy, including the need to clearly convey the committee’s views while appropriately airing individual perspectives,” the minutes said.
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Policy makers saw growth quicken since their last meeting, and “generally agreed that, even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment.” In addition, the “high level of unemployment was limiting gains in wages and thereby contributing to the low level of inflation,” the minutes said.
Terms eased
Since the Fed announced its plans to buy $600 billion of bonds through June, financing terms for companies have eased, U.S. stocks have climbed, inflation expectations have increased and the dollar has strengthened, gaining 6.2 percent versus the euro.
The S&P’s 500 Index of stocks rose 6 percent during the period to close yesterday at 1,270.2 and the extra yield, or spread, investors demand to own high-yield, high-risk securities rather than government debt fell to 5.27 percentage points from 5.92 percentage points on November 3, Bank of America Merrill Lynch index data show.