FOMC Meeting: Rates Steady for an Extended Period, Asset Purchase Programs to End

The FOMC met today, and the news is that there is no news. The Committee intends to maintain "exceptionally low levels of the federal funds rate for an extended period," as before, and to wind down and end its asset purchase programs by the end of the month as planned. Thus, the FOMC has not received any information since its last meeting that would cause it to change its assessment that the economy is on the slow road to recovery. The committee believes that labor markets have finally bottomed out and are set to turn the corner, and that there is no worry about inflation

The most notable part of the statement is the Fed's confirmation of its intent to end its purchase of mortgage backed securities by the end of the month. Many analysts have credited this program with keeping mortgage and other long-term interest rates low, and the worry is that ending this program will cause long-term interest rates to increase harming the recovery. However, many of the same analysts also note that interest rates have held steady even though the Fed has been signaling this program will end, so perhaps the worries are misplaced.

One thing to note, however, is that the Fed can restart this program very quickly if needed. If this is built into financial market expectations, i.e. if agents expect that the Fed will take prompt, aggressive action if long-term rates begin increasing, then I don't think we can learn very much from the fact that markets aren't reacting to the news that the asset purchase program will end at the end of the month.

Here's the statement:

Press Release, Release Date: March 16, 2010, For immediate release: Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, 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 has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.