WASHINGTON — The Federal Reserve, batting away unusually fierce criticisms, forged ahead on Tuesday with its effort to prop up the economic recovery by buying $600 billion in Treasury bonds.þþBut interest rates on government bonds continued to march upward, appearing to defy one of the Fed’s goals for the bond-buying program: lowering long-term interest rates. The yield on the benchmark 10-year note surged to 3.47 percent, up from 3.27 percent late Monday, and the highest level since May. þþIn their last scheduled meeting of the year, Fed policy makers stuck with the bond-buying plan they announced on Nov. 3, finding that the recovery was “continuing, though at a rate that has been insufficient to bring down unemployment.” þþIn its statement, the Fed did not publicly acknowledge, much less react to, the uncertainty in the bond markets or the criticisms leveled by foreign central banks and conservative economists, among others. þþNor did it mention the biggest surprise it has confronted in the six weeks since its bond-buying announcement, the Obama administration’s $858 billion deal with Congressional Republicans to extend all of the Bush-era tax cuts in return for some short-term fiscal stimulus. þþBy raising expectations for growth next year — along with heightening concerns about the size of the deficit — the tax-cut compromise has complicated the Fed’s bond-buying strategy, which was devised over the summer. þþThe recent uptick in interest rates — the 10-year Treasury yield was as low as 2.39 percent in early October, and 2.67 percent on the day of the November announcement — is interpreted in at least two starkly different ways. þþLaurence H. Meyer, a former Fed governor, said the rise in interest rates was a result of more positive economic growth estimates. þþ“What does the Fed say when rates are pulled up by stronger growth? Hooray,” he said in an interview. “How does this change its assessment of the effectiveness of the program? Not at all.” þþEven so, Mr. Meyer suggested that the Fed’s November action — the most momentous decision this year — was made against a different economic and political situation than the current one. þþ“If they had known about the political backlash, the strengthening of the economic data and the totally unexpected fiscal stimulus, I doubt they would have begun the program,” said Mr. Meyer, who runs a forecasting firm, Macroeconomic Advisers. “But now that it’s under way, it’s more disruptive to stop it in the middle than to complete it.” þþOther economists were more skeptical, saying the rise in interest rates demonstrated the limited effectiveness of the Fed’s program to buy bonds in a bid to lower long-term interest rates and spur growth. þþ“All the king’s horses and all the king’s men can’t push bond yields back below 3 percent again,” Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ, wrote in a note to investors after the Federal Open Market Committee, the Fed panel that sets monetary policy, met and announced that it was continuing the bond buying plan. þþ“There must be some disappointment at the F.O.M.C. that the purchases have not kept 10-year yields from rising so much, let alone decline,” Mr. Rupkey wrote. þþThe customary terse statement by the committee offered no clue as to how Fed officials had interpreted recent events like the tax-cut compromise and the rise in interest rates. þþThe committee’s periodic assessment of economic conditions was only marginally more positive than the last one, in November. Investors look for even the slightest changes in wording to gauge shifts in the Fed’s outlook. þþThe committee found that household spending was increasing “at a moderate pace” — instead of “gradually,” as it wrote in November — and “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.” þþIt found that “the housing sector continues to be depressed” and reaffirmed that employers had been reluctant to hire and that measures of underlying inflation had continued to move downward. þþUnsurprisingly, the committee voted to keep the benchmark short-term interest rate — the federal funds rate at which banks lend to each other overnight — at a target of zero to 0.25 percent, the level it has been at since December 2008. þþAnd it repeated its stance that the fed funds rate would remain “exceptionally low” for “an extended period,” the phrases it has used since March 2009.þþAlong with the $600 billion in bond purchases through June — roughly $75 billion a month for eight months — the Fed is using about $30 billion a month in proceeds from its mortgage-related investments to buy Treasury securities. That smaller program was announced in August and is continuing. þþWhile the committee said it would “continue expanding its holdings of securities as announced in November,” it emphasized that it would continue to re-evaluate the effort. þþIt said it would “regularly review the pace of its securities purchases and the overall size of the asset purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.” þþThe committee’s vote was 10 to 1. Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, was again the lone dissenter, as he has been all year. His string of eight dissents is the most in a single year since a Fed governor, Henry C. Wallich, dissented eight times in 1980, according to Fed records. þþ“Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy,” the statement said, summarizing his dissent. þþInvestors had been nearly unanimous in expecting that the Fed would not change course so soon after making a major decision, and those expectations were not disappointed. þþ“If the Fed is going to make any adjustments to its large-scale asset purchase program, they are going to do it next year,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Company in New York, adding, “We don’t foresee that as of yet.” þþMr. Meyer predicted that Ben S. Bernanke, the Fed chairman, would face tough questions from Republicans in the next Congress but that the bond buying strategy would work out for the Fed in the long run. þþ“It’s a very hostile environment, and it’s going to be unpleasant for the chairman for some time, until the economy really seems to be picking up and inflation remains low,” Mr. Meyer said. “Then he’ll look like a genius. When history is written, the Fed will get more credit for the strengthening of growth than it probably deserves.” þþ
Source: NY Times
