Wed October 30, 2013
Why The Fed Decided Not To Change Course
Look around. Do you see much inflation?
Gas prices are down more than 7 percent from last year. Grocery costs haven't budged lately. And — just in time for Halloween — the price of candy is down 2.3 percent from last year, according to the government's consumer price index released Wednesday.
Also on Wednesday, Federal Reserve policymakers concluded that amid tame inflation and slow growth, they see no need to change direction in their approach to helping the economy. They will continue their program of buying bonds to help put downward pressure on the cost of borrowing, which is intended to help boost the battered housing market. The policymakers said the housing recovery "slowed somewhat in recent months" and "the unemployment rate remains elevated."
They "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases" of bonds, the Fed said in its statement.
The Fed's bond-buying efforts helped tamp down mortgage rates to historic lows. While everyone agrees that effort has made mortgage refinancing and homebuying easier, it also has worried many economists who fear that such prolonged intervention in markets will lead to trouble down the road. Trouble is spelled i-n-f-l-a-t-i-o-n.
Fed officials themselves have stated they will have to "taper down" bond purchases eventually to allow rates to return to higher, more normal levels. But as of the end of Wednesday's meeting, that time hasn't come.
The central bank policymakers are worried that without their intervention, lending would get tighter and that would slow the economy.
So what do the latest data tell us about the current state of the economy? Because of the federal government shutdown earlier this month, many key reports have been canceled or delayed, so economists have been working with fewer numbers than usual.
But still, they have enough information from industry and government sources to be able to estimate what is happening. Here are some of the things we know:
- Jobs are growing, but at a disappointing rate. On Wednesday, payroll processing firm ADP said private sector employment rose by 130,000 in October, lower than September's gain of 145,000. "Hiring slowed in October with the government shutdown and debt limit debate, but did not stall," PNC Financial Services Group chief economist Stuart Hoffman said in his assessment.
- The consumer price index shows food prices are flat, and inflation generally is tame. "Soggy demand, weak energy prices, reversal of post-drought price gains in food, and relatively high unemployment rates are all slowly cooling price pressures," IHS Global Insight economist Chris Christopher wrote in his analysis.
- Gasoline in particular has taken a dive, at least compared with last year. Gasbuddy.com says the average gallon of regular gas costs $3.29. At this time last year, it was $3.55.
- Middle-market companies — businesses with annual sales between $10 million and $1 billion — saw revenues grow by 5.5 percent over the past year, but nearly half say government dysfunction is a drag going forward, according to a new survey. "Markets have been roiled by the uncertainties arising out of fiscal cliff, sequestration, government shutdown, and the threat of default," said Anil Makhija, director of the National Center for the Middle Market. In that environment, midsize companies are "intending to create 200,000 less jobs over the next 12 months," he said.
- Consumer confidence, as measured by the Conference Board, a business group, showed a sharp plunge in the past month, with the index falling 11 percent. Lynn Franco, the group's director of economic indicators, said: "Consumer confidence deteriorated considerably as the federal government shutdown and debt-ceiling crisis took a particularly large toll on consumers' expectations."