Fed Links Rate Target to Unemployment Rate of 6.5%

Bikram Pandey
12 Dec, 2012
New York City

Fed in its latest action to buy more Treasury bonds next year followed up on its earlier promise to support the economy and shift attention to lowering unemployment. However, Fed also said it cannot counter entirely the effects of fiscal cliff if lawmakers fail to negotiate a budget agreement.

[R]5:00 PM, New York – Fed in its latest action to buy more Treasury bonds next year followed up on its earlier promise to support the economy and shift attention to lowering unemployment. However, Fed also said it cannot counter entirely the effects of fiscal cliff if lawmakers fail to negotiate a budget agreement.[/R]

Federal Reserve followed up on its promise to keep focus on lowering unemployment and said it will continue the purchase of $85 billion a month in mortgage securities and Treasury bonds.

The commitment was also supported by a Fed statement that said it would keep buying bonds until the labor market improves significantly. Fed also indicated that it plans to keep short term rates near zero as long as unemployment rate stayed above 6.5% and medium term inflation is below 2.5%.

The decision was supported by eleven members of the committee led by the chairman Ben S. Bernanke. Jeffrey M. Lacker, president of the Federal Reserve of Richmond was the lone dissenter.

In September, Fed had announced that it would buy about $45 billion in Treasury securities each month through December. Today, Fed announced a new commitment to continue the monthly purchase in the next year.

Market indexes briefly traded higher after the Fed’s announcement in the afternoon but subsided on the worries about fiscal cliff.

Chairman Bernanke said central bank cannot fully remove the effect of the fiscal cliff, removing some of the positive sentiment from the bond purchase program continuation.

Lawmakers appear to be divided in budget negotiations. House Speaker John Boehner said today President Obama’s demand for tax increase of $1.4 trillion cannot win approval in the House or in the Senate. President lowered his demand for increased tax revenues from wealthy taxpayers from $1.6 trillion to $1.4 trillion.

The U.S. indexes climbed ahead of Fed announcement and import prices fell in November. Chesapeake agreed to sell remaining midstream assets to Access Midstream for $2.16 billion. Costco quarterly net surged 30%.

Costco first quarter net surged 30% to $416 million and Central Garden & pet net loss widened. Dolby declared one-time special dividend of $4 a share. Joy Global fourth quarter net climbed 23% to $212.6 million. TNS agreed to a leveraged buyout offer from Siris Capital Group for $862 million.

European ministers are expected advance banking union negotiations today. Greece plans to buyback €31.9 billion worth of bonds from private investors. Euro zone industrial production fell in October. The UK claimant count declined in November.

Fraport said passenger traffic fell 2.7% in November. BHP agreed to sell its stake in the Browse gas project to PetroChina for $1.63 billion. Peugeot planned to slash 1,500 jobs by 2014. Inditex nine months net sales rose 17% to €11.36 billion.

Stocks in Tokyo held gains after North Korea successfully launched long-range rocket in defiance of international sanction. Defense contractors gained. The yen edged lower and resource sector stocks advanced after iron ore price rose.

Commodities, Bonds and Currencies

U.S. treasury yield on 10-year bond increased to 1.70% and on 30-year bond gained to 2.90%.

The U.S. dollar inched higher to $1.307 to a euro and increased against the Japanese yen to 83.24 yen.

Immediate delivery futures of Texas crude oil increased 98 cents to $86.77 a barrel and Brent crude gained $1.59 to $109.60, futures of natural gas decreased 1 cent to $3.40 per mbtu and gasoline traded up 3.72 cents to 264.77 cents a gallon.

In metals trading, gold increased $3.70 to $1,713.30 per ounce and silver increased 53 cents to $33.55 and copper closed up 2.45 cents to $3.71 a pound.