Fed Policy on Hold for Now, Door Wide Open for More QE Later
- According to today’s FOMC policy announcement, Fed policy is unchanged from September 21.
- The FOMC repeated its view that the Fed funds rate would remain near zero through mid-2013.
- According to the FOMC, economic growth strengthened in the third quarter.
- Inflation appears to have moderated since earlier in the year.
- The ADP Employment Report showed a gain of 110,000 private-sector jobs in October.
- Auto sales ticked up to a 13.2 million unit pace in October despite weak consumer confidence.
Today, the Federal Open Market Committee kept Federal Reserve monetary policy unchanged from September 21. The Fed funds rate will remain at its present near-zero rate at least through mid-2013. There will be no additional quantitative easing for the time being. The Fed will continue its “Operation Twist” policy of selling short term Treasury bonds and buying longer term Treasury bonds in order to flatten the yield curve. Also, it will continue its policy of reinvesting principle payments from its holdings of agency debt and mortgage-backed securities back into agency mortgage backed securities, thus keeping some downward pressure on mortgage rates. The statement had a slightly more optimistic tone on output, noting stronger economic growth in the third quarter. However, FOMC members did lower their GDP forecasts for 2012 and 2013. According to the FOMC, inflation has moderated since earlier in the year and inflation expectations remain stable. There was one dissenting vote, Charles Evans from Chicago, who would have preferred additional policy accommodation at this time. This lone dovish dissent is a change in recent voting patterns that had Fisher, Plosser and Kocherlakota voting hawkish dissents. In his post-announcement press conference, Federal Reserve Chairman Ben Bernanke left the door wide open for additional quantitative easing but would not put any parameters around it. Bernanke said that the housing sector is very important to the economy and that purchases of mortgage-backed securities, with the intent of lowering mortgage interest rates, remain “a viable option.”
Earlier this morning the ADP Employment Report gave us a hint about what to expect from the official BLS employment report, due out Friday morning. According to ADP, private-sector employment increased by 110,000 jobs in October. Auto sales for October ticked up to a 13.2 million unit sales pace despite very weak consumer confidence. Ongoing gains to auto sales would be a strong positive for the U.S. economy.
Market Reaction: Equity markets kept their gains through afternoon trading. Treasury yields are relaxing at the long end of the yield curve. Oil is up to $92.67/barrel. The dollar is down vs. the yen and the euro.