As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength.
Stock markets jumped after the 2 p.m. announcement, with the Standard Poor’s 500-stock index touching a record high and the Dow Jones industrial average ahead more than 150 points.
The Fed’s decision also may reflect the consequences of yet another premature retreat from its own policies. Mortgage rates have climbed and other financial conditions have tightened since the Fed signaled in June that it intended to reduce its asset purchases by the end of the year, the Fed noted Wednesday.
“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market,” it said in a statement released after a regular two-day meeting of its policy-making committee.
The decision, an apparent victory for the Fed’s chairman, Ben S. Bernanke, and his allies who have argued for the benefits of asset purchases, was supported by all but one member of the Federal Open Market Committee. Esther George, president of the Federal Reserve Bank of Kansas City, dissented as she has at each previous meeting this year, citing concerns about inflation and financial stability.
The Fed may still begin to reduce asset purchases by the end of the year, consistent with its previous statements. The Fed also refrained from any change in its stated intention to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent.
The statement said the committee sees recent economic data “as consistent with growing underlying strength in the broader economy.” However, the statement continued, “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
In their economic forecasts, also published Wednesday, Fed officials once again retreated from overly optimistic predictions about the pace of growth over the next several years.
The aggregation of forecasts by the 17 officials who participate in policy-making showed that Fed officials expect growth to remain sluggish for years to come, with persistent unemployment and little inflation, suggesting that the dismantling of the Fed’s stimulus campaign will remain slow and cautious.
The middle of the forecast range for economic growth this year was 2 percent to 2.3 percent, down from June predictions of growth between 2.3 percent and 2.6 percent. For 2013, Fed officials forecast growth between 2.9 percent and 3.1 percent, down from a range of 3 percent to 3.5 percent in June.
The Fed unrolled an aggressive combination of new policies last year in an effort to increase the pace of job creation. It started adding $85 billion a month to its holdings of Treasuries and mortgage bonds, and said it planned to keep buying until the outlook for the labor market improved substantially. The Fed also said that it would keep short-term rates near zero for even longer – at least as long as the unemployment rate remained above 6.5 percent.
Half a year later, in June, Mr. Bernanke, surprised many investors by announcing that the Fed intended to cut back on those asset purchases by the end of the year, an intention the Fed affirmed in July.
Critics had warned that the Fed would be pulling back too soon if it acted Wednesday. Economic growth remains sluggish and job creation is barely outpacing population growth. Roughly half the decline in the unemployment rate over the last year is because fewer people are looking for work, not because more are finding jobs.
Jack Ewing contributed reporting from Frankfurt.
Article source: http://www.nytimes.com/2013/09/19/business/economy/fed-in-surprise-move-postpones-retreat-from-stimulus-campaign.html?partner=rss&emc=rss
DealBook: Geithner Urges an Overhaul of Rules on Money Market Funds
Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at America’s money market funds, which manage $2.6 trillion.
In a letter to the Financial Stability Oversight Council, a special committee of senior regulators set up after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”
The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.
But the commission dropped its attempt at a money market fund overhaul last month after it become clear that a majority of its commissioners were not going to vote for the measures. Large mutual fund companies fiercely opposed the reforms, saying they were unnecessary and could harm a type of investment fund that had proved to be popular.
“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison Foerster, which represents money market funds.
During the 2008 crisis, investors fled money market funds in droves, which worsened the credit freeze that gripped the banking system. Money funds then received a big bailout from the Treasury and the Federal Reserve.
Before the passage of the Dodd-Frank Act, attempts to make changes to the money market fund industry would most likely have died after the commission dropped them. But the Financial Stability Oversight Council, set up by the Dodd-Frank financial overhaul legislation, can choose to take over from the commission.
Mr. Geithner lays out a number of ways in which the council, which meets Friday, can act.
In his letter, he urges the council to gather public comments on a range of reforms and then make a final overhaul recommendation to the Securities and Exchange Commission. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and he hoped they would be considered at the council’s November meeting.
The recommendation would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly below $1.
Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could move forward without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject those firms to regulation by the Federal Reserve, which could then impose an overhaul.
Mr. Baris, the lawyer, said that a designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” he said. “It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules single out specific money market funds.
In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on money market funds.
Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”
If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will most likely contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.
Geithner Letter to FSOC
Article source: http://dealbook.nytimes.com/2012/09/27/geithner-urges-changes-to-strengthen-mutual-funds/?partner=rss&emc=rss