The Federal Reserve ended its two-day meeting Wednesday, and the Federal Open Market Committee (FOMC) held interest rates steady near zero, as expected. The FOMC followed the meeting with a statement saying that "economic activity has picked up." It also indicated US inflation was under control, stating:
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
To provide support to mortgage lending and housing markets, the Fed noted that it expects to finish purchases of "$1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt" in a slowing pace until the first quarter of 2010.
August inflation data showed that consumer prices had decreased 1.5% during the prior 12 months and that core annual inflation, which excludes volatile food and energy prices, rose just 1.4%. That was the smallest year-over-year gain since February 2004, and well within the Federal Reserve’s traditional comfort zone of between 1%-2%.
However, with the massive Fed injection of money into the markets to stimulate the economy, the fear of approaching inflation is a concern for many.
"The Fed has printed a lot of money and unless Milton Friedman was wrong, when you print money inflation is going to be a problem," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala., in reference to the late Nobel Prize-winning economist and free market champion.
The Fed doubled the size of its balance sheet to more than $2 trillion.
An overview of the two-day meeting is provided in the following video report by Conway Gittens from Reuters.
In addition, the released FOMC statement follows in its entirety:
Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
