FOMC Meeting
Bernanke Keeps QE2 Steady As Bond Yields Rise Agustino Fontevecchia, 12.14.10, 4:10 PM ET
No new surprises came out of the final Federal Open Market Committee meeting of 2010, as the Federal Reserve's policy-setting arm kept its target rate for federal funds at between zero and a quarter point and pledged to continue its policy of quantitative easing through mid-2011. Keeping its language identical to its previous statement Nov. 3, the Fed pledged to continue its purchases of long-term Treasuries, as the "economic recovery is continuing, though at a rate that is insufficient to bring down unemployment." The second leg of the Fed's dual mandate, price stability, as measured through inflation, "continued to trend downward" and stood below central bank's target level of around 2%. To Doug Roberts of Channel Capital Research, Tuesday's announcement was more of the same. "[Fed Chairman] Bernanke maintains his usual pattern of disclosing any new or potentially controversial moves in speeches," says Roberts. The central bank's chief "wants FOMC statements to be confirmations of the Fed's existing positions," so as to not disrupt financial markets. Interest rates were kept in the band spanning from 0 to 25 basis points for an "extended period", while the pace of asset purchases, or QE2, will remain at $75 billion per month along with reinvestments of payments from maturing securities on the Fed's balance sheet, subject to regular review by the FOMC. As usual, the only member of the FOMC who dissented was Kansas City Fed President, Thomas Hoenig, who continues to be "concerned that the high level of monetary accommodation would increase the risks of future economic and financial imbalances," leading to unsustainable inflation in the medium to long term. (See "Bernanke Has FOMC Dissent, But Still Runs The Show.") But the Fed's policies seem to be having unintended consequences, as longer term Treasury yields have risen sharply since Bernanke signaled QE2 was likely in an August speech. Professor Victor Li, who worked with Bernanke at Princeton University from 1998 to 2000, suggested that it could be related to expectations of higher growth in the future. "QE2 is designed to lower 10 to 30 year [Treasuries], but if people are expecting the economy to do well in the next 5 to 10 years, then rates are going to come up" as the Fed is forced to
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2010 Media Report Villanova School of Business