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US stock market daily report (September 13, 2012, Thursday)

In an effort to bring down long-term interest rates and spur growth, the Federal Reserve announced a third large purchase of bonds, as the Fed remains concerned that improvement in the unemployment rate has stalled. The Fed said it would buy mortgage-backed securities at a pace of $40 billion per month. The Federal Open Market Committee, which ended a two-day meeting on Thursday, said it was concerned that, without the action, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.” The Fed said it intends to keep the benchmark short-term interest rate, the federal funds rate, at nearly zero until mid-2015 compared to previous guidance for late 2014 - well beyond the term of Federal Reserve Chief Ben Bernanke, which ends early in 2014. Since December 2008, the Fed has left the federal funds rate at nearly zero. The FOMC’s vote was 11-1 with Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he has at every meeting this year. Growing concern for the economic outlook, especially the anemic labor market, called for the Fed to take the aggressive action. “If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the FOMC said. Despite the Fed holding interest rates at zero for more than 3 1/2 years and the central bank buying $2.3 trillion in assets, the U.S. unemployment rate has been stuck above 8% since early 2009 with nearly 12.5 million unemployed workers. Fed officials disagree on whether further asset purchases will have any lasting effect on the economy. The Fed hawks are worried that core consumer price inflation is running at a 2.1% rate over the past 12 months despite the weak economy. The economy remains hostage to headwinds from the European sovereign debt, banking crises and a stalemate over U.S. fiscal policy. Unless both sides of the political isle agree to change current law, deep spending cuts and higher taxes will take effect January 1, 2013. Fed officials see slow growth rate extending into 2013 and 2014. In its statement, the FOMC said that the economy is growing at a moderate pace while business spending appeared to have slowed. From a depressed level, housing was showing further signs of improvement. The FOMC said that inflation “has been subdued” even though some key commodities have increased recently. The Fed said that strains in global financial markets continue to pose significant downside risks to the outlook. The Fed said that it will continue its Operation Twist plan to replace short-term securities on its balance sheet with long-term bonds. Since the recession ended in June 2010, the economy has added a total of 2.8 million jobs from the private sector and government combined. It will also maintain its existing policy of reinvesting principal payments in MBS. The Fed said these actions will increase the Fed’s holding of longer-term securities by nearly $85 billion each month, through the end of 2012. The purchases “should put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative". In his Jackson Hole speech, Fed Chairman Ben Bernanke said the stagnation in the labor market was a 'grave concern'. Bernanke said that prior rounds of quantitative easing had worked and could continue to be effective. “Overall, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” Bernanke said. He also said the costs of the program 'appeared manageable'. Bernanke said the first two rounds of asset purchases may have increased private payroll employment by more than 2 million jobs.

The following is the official statement issued by the Federal Open Market Committee after its two-day meeting on Thursday: "Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.”

The U.S. Labor Department reported on Thursday that applications for U.S. jobless benefits jumped by 15,000 to a seasonally adjusted 382,000 - the highest level of claims since mid-July - in the week ended September 8, with about half the increase related to tropical storm Isaac. Labor Department said about 9,000 claims stemmed from the storm that passed through the Gulf Coast in late August. Initial jobless claims from two weeks ago were revised up to 367,000 from original reading of 365,000, based on more complete data collected at the state level. The average of new claims over the past month, meanwhile, rose by 3,250 to 375,000, also the highest level since mid-July. Labor Department said continuing claims decreased by 49,000 to a seasonally adjusted 3.28 million in the week ended September 1. Nearly 5.39 million people received some type of state or federal benefit in the week ended August 25, down 78,465 from previous week.

The U.S. Treasury Department said on Thursday that the U.S. government's budget deficit for fiscal 2012 crossed the $1 trillion mark in August, to stand at $1.16 trillion. The U.S. government ran a monthly deficit of $191 billion, spending $369 billion and taking in $179 billion. The year-to-date figure marks the fourth consecutive year of $1 trillion-plus deficits under President Barack Obama. The U.S. federal government's fiscal year runs from October to September.

The New York Fed said it will start buying agency mortgage-backed securities on Friday, at a rate that is expected to total $23 billion over the remainder of September. The Fed will then purchase securities at a clip of $40 billion each month. The New York Fed said it will concentrate its purchases in newly-issued agency MBS in the to-be-announced market, although it may purchase other agency MBS if market conditions warrant.

Super-size no more - New York City's board of health passed a rule on Thursday that will ban large-sized sodas and other sugary drinks from being sold at restaurants, concession stands plus, some other locations. The new rule adopted means that cups and bottles of targeted sugary beverages can only be sold in containers with maximum size of 16 ounces. The rule applies to fast-food outlets, theaters and workplace cafeterias but, not in supermarkets or convenience stores. The law is intended to combat what some consider an epidemic of obesity.