The Federal Reserve’s policy making committee still has its lasers focused on the weak points in this economic recovery. In the minutes of the open market committee meeting, released today, the Fed noted that the economy is improving but it also noted ongoing weakness in the labor market and the fact that bank lending continues to contract. It didn’t need to say anything about the debt crisis rolling across Europe–that’s the elephant in the room. The bottom line: Don’t worry about inflation or interest rates; worry about the economic recovery. And, thankfully, that’s just what they are doing. The Fed is not only keeping the Fed Funds rate near zero, there is also no evidence that they have begun to shrink their balance sheet, nor are they anywhere close to selling off the $1.5 trillion in mortgage securities that they are sitting on. The good news there is that both long and short-term interest rates should stay tame for the foreseeable future.
Here’s the text of the Fed’s summary, minus a notation that one committee member, Thomas Hoenig, dissented from the committee’s view:
Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.