FOMC Leaves Rates Unchanged

The Federal Open Market Committee today left the Federal funds rate in a "range from 0 to 1/4 percent." The discount also was left unchanged at 0.50%. The Fed funds rate remained the lowest ever and the lack of action at this meeting was generally anticipated by economists.

Regarding economic growth, the Fed indicated that "the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending ... The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant."

Regarding inflation it was indicated that "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

The Fed emphasized its concern about the recent turmoil in the credit markets. "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability ... The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."

The decision was unanimous amongst FOMC voters except that Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

For the complete text of the Fed's latest press release please follow this link.

Growth in economic liquidity has risen. The money stock measure M2 rose at a 17.0% rate over the last three months, up from a 5% growth rate earlier this year. The level of demand deposits has surged by two-thirds since the Spring.  In addition, the monetary base has roughly doubled since last Spring.  At the same time, inflation expectations have fallen sharply.

The Haver databases USECON, WEEKLY and DAILY contain the figures from the Federal Reserve Board.

Need to Fix Banking Sector for Stimulus to Work is a recent article published in the IMF Survey Magazine: In the News and it can be found here.

Money, Liquidity, and Monetary Policy from the Federal Reserve Bank of New York is available here.