Economics Update

It's been a busy economic news day, with the Federal Reserve declaring that  it will keep its benchmark interest rates low for the next two year:

The stock market staged a dramatic rebound Tuesday, recording the biggest gains after the Federal Reserve announced it would keep its ultra-low interest rate policies in place for two more years.

The surge ended a wild day of trading in which the Dow Jones industrial average dipped in and out of negative territory four times, giving back hundreds of points in early gains before finishing the session up 429 points. That represented a nearly 4 percent rise, the largest increase in two years.

Investors seemed uncertain about what to make of the announcement by the Fed’s main policymaking board, which for the first time set a firm date for maintaining its near-zero target for short-term interest rates. This move could provide businesses and consumers with greater certainty about the availability of low-cost borrowing as they consider making investments or major purchases, such as homes or autos.

At the same time, the Fed declined to make any significant new efforts to bolster the nation’s flagging recovery. A rare dissent by three of the policy committee members to the interest rate decision signaled that it could prove hard for the central bank to take more dramatic steps in the coming months to lift the economy and prop up the financial system.

When one considers the fact that the interest is effectively 0%, this is not a ringing endorsement of where the economy is going, and the markets were hoping for more.  (Full Fed Statement below the fold)

Why are the markets expecting more, perhaps because productivity fell for the 2^nd straight quarter, and small business optimism for the 5^th straight month.

Between Democrats who believe in the austerity fairy, and Republicans who are deliberately tanking the economy for political advantage, the Fed is all we have to fix things.

Press Release

Release Date: August 9, 2011

For immediate release

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.