FOMC: Global Financial Markets Pose Downside Risk to U.S. Economic Outlook

The U.S. economy has been expanding moderately over the last month, with indicators pointing to some improvement in overall labor market conditions, according to the Federal Open Market Committee.

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Household spending has continued to advance since the FOMC last met in November, according to minutes from a meeting released on Tuesday, “but business-fixed investment appears to be increasing less rapidly and the housing sector remains depressed.”

The Federal Reserve says that inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable. However, strains in global financial markets continue to pose “significant downside risks” to the U.S. economic outlook.

The committee expects a “moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate,” read the minutes.

To fulfill its statutory mandate to foster maximum employment and price stability, the committee decided to continue its ‘Operation Twist’ program to extend the average maturity of its holdings of securities, as announced in September.

The committee also decided to maintain its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities, and of rolling over maturing Treasury securities at auction. They will regularly review the size and composition of their securities holdings, and are “prepared to adjust those holdings as appropriate.”

Perhaps the most notable decision by the FOMC is that to keep the target range for the federal funds rate at 0 to 0.25 percent. Taking into account economic conditions, “including low rates of resource utilization and a subdued outlook for inflation over the medium run,” the Fed says it is likely to keep interest rates low at least through mid-2013.

The FOMC minutes conclude with the committee saying it will “continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.”

All but one committee member — Charles L. Evans — voted in favor of the monetary policy action. Evans supported additional policy accommodation.

All three major U.S. equity indices reversed their daily gains after the statement, with the Nasdaq leading the decline, down 1.26% to 2,579 points as of 3:28 p.m. in New York. The S&P 500 fell 0.85% to 1,226 while the Dow slid 0.32% to 11,983 points. Yields on 10-year Treasuries dipped to 1.98% while gold was fell 0.8% to $1,651 per ounce.

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