The Federal Reserve moved closer to a second wave of unconventional monetary easing and said for the first time that too-low inflation, in addition to sluggish growth, would warrant taking action.
The Federal Open Market Committee’s statement yesterday that inflation is “somewhat below” levels consistent with its congressional mandate for stable prices pushed yields on two-year Treasuries to a record low. The language evoked FOMC warnings in 2003 of the risk of inflation “becoming undesirably low” that justified the era’s low-rate policy.
The move by Chairman Ben S Bernanke, 56, who was a chief advocate of the 2003 stance, positions the Fed for expanding a near-record $2.3 trillion balance sheet as soon as November.
Too-low Inflation could result in higher real interest rates and further slow the economy while increasing chances of deflation, or a broad-based decline in prices, said Mark Gertler, a New York University economist.
“The language on inflation is a pretty clear message that they’re going to do something” and purchase more securities, said John Canally, an investment strategist and economist at LPL Financial Corp, which oversees $276.9 billion in Boston. “The question that will be repeatedly asked over the next six weeks in the markets is, How much are they going to do and will it work?” Canally said, referring to the FOMC’s next meeting November 2-3.
The FOMC said in its statement that it’s “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
More From This Section
The central bank retained its policy, begun last month, of reinvesting proceeds from the repayment of mortgage debt into long-term Treasuries. The committee also kept the benchmark federal funds rate in a range of zero to 0.25 per cent, where it’s been since December 2008, and reiterated that the rate will stay “exceptionally low” for an “extended period”.
Two-year Treasury yields fell four basis points to 0.42 per cent yesterday after reaching an all-time low of 0.4155 per cent. A basis point is 0.01 percentage point. The 10-year Treasury yield lost 13 basis points to 2.58 per cent.
Gold futures surged as much as 0.9 per cent to $1,292.40 an ounce as of 4 pm in New York as the dollar depreciated against 15 of 16 major counterparts.
The Standard & Poor’s 500 Index slipped 0.3 per cent to 1,139.78, retreating from a four-month high. Oil lost 1.8 per cent to $73.52 a barrel.
The previous statement, from August 10, said the Fed would “employ its policy tools as necessary to promote economic recovery and price stability.”