Federal Reserve expects a somewhat slower pace of recovery

(Image: Flickr Creative Commons/David Beyer)

The Federal Reserve’s policy committee, the Federal Open Market Committee (FOMC), met Tuesday and voted on what course of action they would take with respect to U.S. monetary policy in the coming months. Their statement reflects the commonly-held perception that the recovery from the Great Recession has stagnated:

… 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.

The statement gave no explanation for what other factors might be keeping economic activity at a weakened level. It does also note that inflation, which rose slightly earlier in the year due to higher oil and commodity prices, has flattened out once again, and that long-term inflation expectations remain stable.

In response to their own forecasts, the FOMC says it will continue to keep the federal funds rate, the rate at which banks borrow money from the Federal Reserve, at extremely low levels — from 0 to 1/4 percent — until at least the year 2013. The funds rate has been at that level since 2008, but this is the first time that the FOMC has given an explicit time period through which it would maintain such low rates.

The statement showed no intention for the Fed to engage in a third round of quantitative easing, a strategy of purchasing billions of dollars worth of assets in an effort to drive down long-term interest rates and stimulate borrowing. Nevertheless, the stock market rebounded after the FOMC meeting, with the S&P 500 rising 4.8 percent, a faster increase than at any point since March 2009, after a drop of 6.7 percent on Monday.

Much attention has focused on the Federal Reserve’s latest meeting after the stock market plummeted last Friday at a rate faster than it had on any day since December 2008. Some blamed the volatile market on the decision by the S&P to downgrade American government debt from the AAA to the AA+ rating, the first such downgrade in U.S. history. However, Treasury bonds actually rose in value on Monday and Tuesday, indicating an increasing willingness to lend money to the United States despite the downgrade.

The ongoing debt crisis in Europe, the mediocre June and July jobs reports and the reduced estimates of economic growth in the past few years by the Commerce Department are other reasons for investors to be concerned that the economic recovery has stalled.

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