The Federal Reserve announced no policy changes Wednesday, reiterating its long-held position that the flagging U.S. economy warrants careful attention but no immediate action.
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No new stimulus programs were announced and interest rates were maintained at their historically low levels and will stay there until at least late 2014.
Analysts have suggested the Federal Open Market Committee, which sets most fiscal policy and wrapped up two days of meetings today, likely realizes that a shift in fiscal policy at this point probably won’t have much impact on a sluggish labor market, clogged housing sector and slowing growth.
Stock markets dipped on the announcement, immediately dropping into negative territory following the 2:15 p.m. EST announcement. But the big selloff predicted by some if the Fed failed to take significant action hasn’t materialized. The Dow Jones Industrial Average was down 17.30, or 0.13%, at 12,991.38.
Pressure was rising earlier in the week for the Fed to announce new stimulus, preferably a new bond buying program. The Fed has purchased nearly $3 trillion in government bonds during two previous quantitative easing programs.
Investors were gearing up for such a move and the expectation was that a big selloff would follow anything less than new stimulus. But the Fed offered nothing new.
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The Fed’s statement differed little from its June statement. Changes included: in the current statement the economy is described as having “decelerated somewhat” since the last statement was issued. In June, the Fed described the economy as “expanding moderately.”
In the last sentence, the FOMC statement released today says the committee will provide “additional accommodation” as needed. Previously, the committee had promised “further action” as appropriate.
Richmond Fed President Jeffrey Lacker was the lone dissenter among FOMC members.
The Fed’s inaction was widely predicted.
"As we expected, the FOMC made few changes to its statement at today's meeting; in particular, the Fed kept the "late-2014" language in place, rather than extending it as some analysts had speculated. The Committee made several housekeeping changes to reflect incoming data, and signaled more clearly that it has an easing bias and will provide additional accommodation if the incoming data do not improve," Barclay's economist Dean Maki in a note.
Many analysts have acknowledged that monetary policy alone isn’t enough to fix the myriad problems that are holding back a full-fledged economic recovery in the U.S. And it’s not as if the Fed hasn’t tried. Since 2008 the Fed has kept interest rates at the historically low range of 0%-0.25%, and pledged to maintain those low rates until the end of 2014.
In spite of these measures, the economy is still sagging. Unemployment remains above 8% and each of the last four monthly jobs reports has been disappointing. Last week the government reported that GDP had slowed to 1.5%, down from 2% during the first quarter. Simply put, the economy isn’t growing fast enough to generate the number of jobs needed to reduce the unemployment rate.
The economy provided more mixed data on Wednesday. The private sector added 163,000 jobs in July, according payroll processor ADP. Analysts had been expecting an increase of 120,000. The June increase was, however, revised down to 172,000 from 176,000.
This report comes ahead of the important monthly employment report from the Labor Department on Friday. Recent data have shown the jobs market failing to pick up steam quickly enough to materially drive down the unemployment rate.
Meanwhile, the U.S. manufacturing sector shrank for the second month in a row in July as new orders improved modestly but employment dropped to a 2-1/2-year low. The Institute for Supply Management said its index of national factory activity inched up to 49.8 from 49.7 in June, shy of economists' expectations for 50.2. A reading below 50 shows contraction in the sector.
The Fed also said Wednesday it will extend its Operation Twist program, in which short-term assets are being swapped for long-term assets to push interest rates lower.
But new quantitative easing will have to wait until September, if it happens at all.