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FOMC Ties Fed Funds Rate to Unemployment

Despite recent improvements in the unemployment rate and housing, the Federal Open Market Committee (FOMC) voted Wednesday to continue its program of purchasing $40 million a month of mortgage backed securities and to maintain the target Fed Funds rate at 0 to 0.25 percent. The ""FOMC"":http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm vote was 11-1 with only Richmond Fed President Jeffery M. Lacker dissenting.


""This exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 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,"" the FOMC said in its post-meeting statement. ""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.""

According to the Federal Reserve's own projections, issued two hours after the statement, those targets will not be met until 2015, a forecast unchanged from the projections issued in September.

“The conditions now prevailing in the job market represent an enormous waste of human and economic potential,” Fed Chairman Ben S. Bernanke said in a press conference in Washington after the FOMC meeting. The Fed plans to “maintain accommodation as long as needed to promote a stronger economic recovery in the context of price stability,” he said.

Linking the Fed Funds rate to economic indicators represents another innovation by Bernanke, a former Princeton University professor and Great Depression expert who has pushed the policy-setting FOMC to new territory as he battled the recession and then sought to jolt the nation first out of recession and a painfully slow recovery.

The FOMC cut the target Fed Funds rate to its current level in December 2008, a year after the onset of the recession.

""Economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions,"" the committee said in the statement announcing its decision. ""Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.""

The committee statement made no reference to the looming fiscal cliff and its likely impact on the economy.

Today's meeting marked the last in which Lacker, Atlanta Fed President Dennis Lockhart, Cleveland Fed President Sandra Pianalto, and San Francisco Fed President John C. Williams were full voting members of the Open Market Committee. They will rotate off and be replaced in 2013 by St. Louis Fed President James Bullard, Chicago Fed President Charles Evans, Boston Fed President Eric Rosengren and Kansas City Fed President Esther George.

The committee said it ""remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions"" and ""strains in global financial markets continue to pose significant downside risks to the economic outlook.""

In addition to continuing its agency MBS purchase program, the FOMC said it will extend its program to buy longer-term Treasury securities after its program is continued at the end of the year. That program was constructed to extend the average maturity of the Fed's holdings of Treasury securities.

The committee said it would also maintain its policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities, in January, will resume rolling over maturing Treasury securities at auction.

""Taken together,"" the Committee said in its statement, ""these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.""

Lacker, the committee said, voted against the policy because he ""disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.""

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.

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