Fed Holds Direction on Monetary Policy

The ""Federal Reserve"":http://www.federalreserve.gov says economic recovery is continuing but at a rate that has been insufficient to bring down unemployment. In an ""official statement"":http://www.federalreserve.gov/newsevents/press/monetary/20101214a.htm issued following the board’s monetary policy meeting Tuesday,[IMAGE]the central bank called progress toward its objectives of creating jobs, stabilizing prices, and fostering economic growth “disappointingly slow.”

Board members voted to keep the target range for the central bank’s benchmark federal funds rate -- the rate at which banks lend to one another -- at 0 to 0.25 percent, a level they've maintained for two years now.

They stuck by their guarded outlook that “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

Fed officials also reiterated their commitment to purchase an additional $600 billion in long-term Treasury securities by June 2011, a pace of about $75 billion per month, despite strong criticism of the strategy.

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The effort is intended to spur spending, foster job creation, and keep deflation in check, according to Fed officials. A targeted offshoot is that the move should keep long-term interest rates low, as well.

But since the plan was announced in early November, rates have begun to climb. Long-term ""mortgage rates last week"":http://dsnews.comarticles/mortgage-rates-climb-for-fourth-straight-week-2010-12-09 jumped nearly 20 basis points in just one week’s time.

The Fed says it will regularly review the pace of its securities purchases and the overall size of the asset-purchase program and will adjust the program as needed to foster “maximum employment and price stability.”

The central bank also said Tuesday it would maintain its existing policy of reinvesting principal payments from existing securities holdings.

These reinvestments should amount to another $250 billion to $300 billion in Treasury bond purchases between now and mid-2011.

As he’s done for many months now, Kansas City Fed Chief Thomas Hoenig cast the only dissenting vote against Tuesday’s policy action.

Hoenig, who moves off the Fed's rotating board in early 2011, says in light of the improving economy, he is concerned that a continued high level of monetary accommodation will increase the risks of future economic and financial imbalances and, over time, will cause an increase in long-term inflation expectations that could destabilize the economy.