As expected, the U.S. Federal Reserve did not decide to taper asset purchases during a two-day policy meeting, which concluded on Wednesday. The Fed will continue purchasing agency mortgage-backed securities at a rate of $40 billion per month and longer-term securities at a rate of $45 billion per month, as well as continue reinvesting the principal from these holdings and rolling over maturing Treasuries at auction. These actions, known as quantitative easing, are designed to put downward pressure on longer-term interest rates, making overall financial conditions more accommodative.
Only one member of the Federal Open Market Committee (FOMC), Kansas City Fed President Esther George, voted against the action. George is 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,” according to a Fed press release.
Inflation concerns are absolutely legitimate, but given the soft price pressure indicated by recent data, it may actually be a second-order consideration. Highlighting the risk of “financial imbalances” is a polite way of saying that there is a risk of bubbles forming in the financial markets, which for many is a first-order consideration. One of the effects of quantitative easing is higher equity valuations, but the stimulus does little to actually improve fundamental performance.
For his part, Federal Reserve Chair Ben Bernanke’s term will expire on January 31. Barring political shenanigans on the part of Sen. Rand Paul (R-Ky.), Janet Yellen is set to assume the office. Paul has threatened to use an opaque practice within the Senate known as a “hold” to tie up the confirmation process in order to bring attention to a piece of legislation that would require the Comptroller General to complete an audit of the Fed.
In a statement, Paul said that Americans “have a right to know what this institution is doing with the nation’s money supply. The Federal Reserve does not need prolonged secrecy — it needs to be audited.”
For the record, the Fed is already audited. The Fed reports that its operations are reviewed by the Government Accountability Office and an outside auditor retained by the Office of Inspector General. The Fed also regulatory reports to Congress.
While the debate over the Federal Reserve’s transparency and its future policy rages on, the institution will stick to its previous guidance. The Fed has established a 6.5 percent headline unemployment threshold and a “speed limit” of 2.5 percent inflation as criteria for a policy change. Until incoming data show real improvement in labor market conditions, most economists are expecting more quantitative easing.
The most recent Employment Situation report certainty didn’t provide the information the Fed was looking for. Headline unemployment did edge down, to 7.2 percent, but labor force participation continued to fall and the average duration of unemployment edged higher. The ADP National Employment Report for October also showed weak nonfarm private-sector job growth of 130,000 for the month.
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