The September 13, 2012 U.S. Federal Open Market Committee Announcement and Federal Reserve Chairman Bernanke’s Comments

At a 2:15pm press conference today, Federal Reserve Chairman Bernanke outlined the reasoning behind today’s Federal Reserve Open Market Committee (FOMC, the Fed) announcements. The Chairman began his remarks by citing that since 2009, 8 million jobs have been lost while 4 million jobs have been restored; presently 5 million people have been out of work for more than six months. The Chairman cited the loss of U.S. jobs and productivity as a significant detriment to U.S. economic and labor potential. The Chairman also stated “we cannot solve this problem by ourselves” and “Federal Reserve tools alone are not adequate” to repair current economic conditions. On a forecasted basis, The Chairman stated the FOMC projects the U.S. unemployment rate to be in the range of 8% to 8.2% through 2013, and to be at approximately 6% at year end 2015; inflation is expected to remain low and the GDP growth target of 2% has increased to 3% at 2015. State and local governments will continue to see tight budgets. The Chairman’s comments follow today’s much anticipated announcement by the FOMC as summarized below, and which provided more precision as to the policies the FOMC will implement if  U.S. “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

Today’s FOMC announcement is consistent with the Chairman Bernanke’s broader August 28, 2012 Jackson Hole comments, which cited similar prospective Fed actions. While today’s FOMC comments also raise additional questions as to the specific economic growth factors that will cause the cited FOMC action, the goal to improve U.S. employment rates and maintain low mortgage interest rates to buttress and increase home purchases is clearly stated by Chairman Bernanke.

In today’s announcement, the FOMC cited two actions it would take where economic growth does not reflect sustained growth: 1) purchasing additional mortgage and agency-backed securities at a pace of $40 billion per month and 2) maintaining the benchmark short-term interest rate, known as the federal funds rate, at nearly zero until mid-2015.

U.S. economic factors to consider with today’s FOMC announcement include the September 7, 2012 U.S. unemployment report and the below-expectation addition of 95,000 jobs in August 2012 (by comparison 85,000 jobs were added in August 2011), and the overall tepid rate of U.S. economic growth. While the Federal Reserve Governors have maintained split views in the recent past as to FOMC policies that would promote economic growth, they agreed upon today’s announcement by a vote of 11 to 1. While there are already comments from the marketplace and policy makers both supporting and criticizing today’s Fed announcement, the Fed has cited a more long-term plan of action steps where previously Fed guidance was on a short-term and almost month-to-month basis. Today’s Fed announcement is intended to provide clearer long-term guidance as the lack thereof has been criticized by Congress, business, investors, and others. 

Among the many comments cited today by Fed observers, the Fed is aware it does not directly create jobs or employ business workers and such is not the Fed’s mandate.   Additionally, the Fed has urged Congress to do more to spur economic growth, specifically to better control and reduce current U.S. debt and deficit levels. Separately, the U.S. House is voting today to extend governmental spending for an additional six months; the provision is expected to pass the House with the Senate yet to vote.

Investors' long term decisions should not overweight today’s events or the equity and bond markets behavior in the U.S. and around the world. Short- and long-term uncertainty and complexity as to long-term economic impacts could cause market volatility. Investors should remain attendant to their long-term asset allocation models and investment policy statements, considering their unique factors and risk tolerance investment horizon.

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