Fed Cites Unemployment in Sticking With Bond Plan

WASHINGTON (Dec. 14) -- The Federal Reserve said Tuesday it will maintain the pace of its $600 billion Treasury bond-buying program because a slowly improving economy is still too weak to bring down high unemployment.

Fed policymakers said they'll continue to monitor the bond-buying program. They left open the option of buying more bonds if the economy weakens, or less if it strengthens more than expected. The bond purchases are intended to lower long-term interest rates, lift stock prices and encourage higher spending.

But after the Fed issued its statement, Treasury prices sank, pushing their yields higher. The yield on the 10-year Treasury note jumped to 3.46 percent, its highest level since May and well above the 3.28 percent it traded at late Monday. The yield on the 10-year note helps set interest rates on many kinds of loans including mortgages.

Bond yields have been rising over the past two months as investors have raised their expectations for growth and inflation.

Stock investors were more focused Tuesday on encouraging news that showed the fifth straight month for retail sales gains. Stocks maintained their gains, but were little changed after the Fed's statement was released.

Critics contend that the Fed's bond-purchase program would do little to help the economy and could hurt it by unleashing inflation and speculative buying in assets like stocks.

But the Fed, in its statement, said it sees no threat of inflation. The Fed once again left its key short-term interest rate near zero, where it has been since December 2008. It also repeated its pledge to hold rates at those ultra-low levels for an "extended period."

A broad tax-cut plan emerging in Congress is easing pressure on the Fed to stimulate growth through its bond purchases.

In deciding to stay the course, the Fed said the "economic recovery is continuing, thought at a rate that has been insufficient to bring down unemployment."

Other than spotlighting the high unemployment rate, the Fed's statement was essentially the same as the one issued after policymakers adopted the bond-buying program at their Nov. 3 meeting.

Unemployment rose to 9.8 percent in November, a seven-month high. It has exceeded 9 percent for a record stretch of 19 months. And some economists predict it could climb to 10 percent by early next year.

Concerns about persistently high unemployment was the main motivation behind the Fed's decision to launch a second round of economic stimulus last month with the launch of the bond-buying program.

Progress on its goal of reducing unemployment has been "disappointingly slow," the Fed said Tuesday, echoing language it used last month.

Looking at other parts of the economy, the Fed said noted that consumer spending is increasing at a moderate pace, but still remains constrained by high unemployment, scant income gains, weak home values and hard-to-get credit.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented on Tuesday for an eight straight meeting.

All year, Hoenig voted against the Fed's actions to shore up the economy - from holding rates at record lows near zero to the $600 billion bond-purchase program. Hoenig doesn't think the economy needs the extra help. He worried that the Fed's actions will trigger inflation and a wave of speculation in financial markets.

In the policy statement released after its meeting, the Fed didn't make mention of the tax cut plan, which is designed to bolster the economy.

Key elements of the tax-cut plan include: extending 2001 and 2003 income tax cuts for two years; renewing long-term unemployment benefits for 13 more months; and reducing workers' Social Security taxes in 2011. Economists say it will boost spending by individuals and businesses. That will strengthen growth and lead companies to hire more.

"That surely puts less of the burden to boost growth on the Fed," Paul Dales, economist at Capital Economics, said of the tax cut package.

Even so, Dales and other economists believe the Fed will carry out its $600 billion purchases of government bonds by the end of June, as scheduled.

"With the jobless rate at 9.8 percent, the economy needs all the help it can get," said Sung Won Sohn, economist at California State University.

But if the economy gains momentum next year, it is possible the Fed could reduce its $600 billion program, he said.

The Fed's next meeting is on Jan. 25-26.

by Jeannine Aversa Associated Press December 14, 2010


Fed Cites Unemployment in Sticking With Bond Plan