Ben Bernanke

Federal Reserve Holds Off on Stimulus Despite Weaker Growth

Aug. 1, 2012
Downplays rebound of housing market Current monetary policy unchanged Dow Jones Industrial Average fell after Fed statement

The Federal Reserve downgraded its assessment of the U.S. economy Wednesday, saying growth had slowed, but shied away from launching a fresh round of economic stimulus.

"Economic activity decelerated somewhat over the first half of this year," the Fed said at the conclusion of a two-day top-level meeting as it left current monetary policy in place.

The interest rate-setting Federal Open Market Committee (FOMC) said it expected "economic growth to remain moderate over coming quarters and then to pick up very gradually."

"The unemployment rate will decline only slowly," it said.

The bank also downplayed glimmers of hope that the housing market is starting to rebound, saying: "Despite some further signs of improvement, the housing sector remains depressed."

But there was no new action to juice the economy.

Instead bank policymakers reiterated their pledge to leave interest rates close to zero until the end of 2014 and reaffirmed their readiness to act.

Inaction Prompts Puzzlement

The decision not to pull the trigger on new measures puzzled some analysts and investors.

The Dow Jones Industrial Average fell sharply after the Fed statement was published. It ended the day down 0.3% and under the symbolic threshold of 13,000 points.

A Surprise Move

Ryan Sweet of Moody's Analytics described the Fed's decision not to provide more stimulus or extend the timeframe for low rates as "a bit of [a] surprise move."

"There was a strong case for changing the rate guidance," he said, adding that "the odds of the Fed launching a third round of quantitative easing in September are lower."

The Fed vowed to "provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

The Fed has kept interest rates at historic lows, between zero and 0.25%, since December 2008 and dished out liquidity in a bid to spur recovery from the Great Recession.

With few tools left in the box and the outlook murky, the Fed has been reluctant to embark on a third round of asset purchases, or quantitative easing, dubbed QE3.

Chairman Ben Bernanke and his colleagues have preferred to wait and see whether a recent slowdown has been a blip, or a harbinger of worse times ahead.

All eyes will now be on U.S. jobs and unemployment data slated for release on Friday, which could make or break the chances of more stimulus when the Fed meets again in September.

"This is the first time in five years of near-constant easing that I can remember the FOMC doing less than I expected," said Stephen Stanley, chief economist at Pierpont Securities.

"Instead, the committee put themselves on a state of heightened alert."

"Clearly, the heightened alert language is meant to send the signal that the FOMC is prepared to do something significant in September unless things get better."

Once again Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, was the only dissenting voice. He voted against current policy, voicing concern about declaring a time period for low rates.

Copyright Agence France-Presse, 2012

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