Facing away from the enemy

10 August 2010 By Martin Hutchinson

Spooked by slowing growth, the central bank has loosened money a bit by opting not to let maturing mortgage bonds run off. But weaker productivity has now joined rising global prices to add to US inflationary pressure. The Fed has put itself in position to lag any economic shift.

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The Federal Open Market Committee at its meeting Aug. 10 maintained the target range for the federal funds rate at 0 to 0.25 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 levels of the federal funds rate for an extended period.

The Fed also announced that to help support the economic recovery in a context of price stability, the FOMC would keep constant the Fed's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgagebacked securities in longerterm Treasury securities.

Nonfarm business productivity fell at a 0.9 percent annual rate in the second quarter of 2010, with output rising at 2.6 percent and hours rising at 3.6 percent. From the second quarter of 2009, both output and productivity increased 3.9 percent; hours were unchanged.

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