FOMC Continues MBS Purchase Program

With a nod to the report the ""nation's economy had contracted"":http://dsnews.comarticles/gdp-falls-in-4q-first-drop-since-recession-ended-2013-01-30 in the fourth quarter, the Federal Open Market Committee (FOMC) voted Wednesday to continue its program of purchasing $40 million a month of mortgage-backed securities (MBS) and to maintain the target Fed Funds rate at 0 to 0.25 percent. The ""FOMC"":http://www.federalreserve.gov/newsevents/press/monetary/20130130a.htm vote was 11-1 with only Kansas City Fed President Esther George (in her first meeting as a voting member of the Committee) voting ""no.""

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The FOMC did not directly reference the report earlier in the day from the Bureau of Economic Analysis (BEA) that showed the nation's gross domestic product contracted unexpectedly in the fourth quarter. The committee said, however, in its end-of-meeting statement, ""growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors."" In its report, the BEA attributed part of the drop in GDP to the drought in the Midwest and Superstorm Sandy, thought it could not put a precise value on the impact of the storm which ravaged the Northeast at the end of October.

""Employment has continued to expand at a moderate pace,"" the FOMC said, ""but the unemployment rate remains elevated.”

The committee reiterated its plan to hold the target federal funds rate at near zero ""at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.""

The FOMC said, ""in determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

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When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.""

The FOMC said it ""expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate [price stability and maximum, sustainable economic growth usually measured by the unemployment rate] . Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook.""

In addition to continuing its MBS purchase program, the committee said it would also continue to buy longer-term Treasury securities at a rate of $45 billion per month and reinvest principal payments from its holdings of agency debt and MBS in agency MBS and of rolling over maturing Treasury securities at auction ""to support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate.""

The actions, taken together, ""should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.""

The FOMC warned ""if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.""

George, along with St. Louis Fed President James Bullard, Chicago Fed President Charles Evans, and Boston Fed President Eric Rosengren, replaced Richmond Fed President Jeffrey Lacker, Atlanta Fed President Dennis Lockhart, Cleveland Fed President Sandra Pianalto, and San Francisco Fed President John C. Williams as voting members after the December meeting. Lacker had dissented consistently from the Committee's policy position. George, the Committee statement said, ""was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.""

_Hear Mark Lieberman Thursday on P.O.T.U.S. radio, Sirius-XM 124, at 6:40 a.m. and at 9:40 a.m. and again Friday at 8:45 a.m. and 11:45 a.m. Eastern time._