No Changes to Fed Policy, All Eyes on Europe
- According to today’s FOMC policy announcement, Fed policy will remain unchanged from November 2.
- The FOMC repeated its view that the Fed funds rate would remain near zero at least through mid-2013.
- “Operation Twist,” the Fed’s program to extend the maturity of its Treasury bond holdings, will continue.
- Inflation has moderated and longer-term inflation expectations remain stable.
- U.S. economic conditions have improved but growth in business fixed investment has moderated.
- Strains in global financial markets pose “significant downside risk” to the U.S. economy.
At its regularly scheduled meeting today, the Federal Open Market Committee issued a “placeholder” statement, providing a little color on current economic conditions, but keeping policy unchanged. The FOMC reiterated its commitment to keep the Fed funds rates at “exceptionally low levels” until at least through mid-2013. The Fed will continue its “Operation Twist” program of extending the average maturity of its security holdings, as announced in September. The FOMC acknowledged that the U.S. economy has been expanding moderately through the fourth quarter, while there has been some apparent slowing in global growth. They go on to say that strains in global financial markets continue to pose significant downside risks to the U.S. economy. U.S. labor market conditions have improved, but the unemployment rate remains elevated, and will decline only gradually. Household spending continues to advance, Business fixed investment appears to be increasing less rapidly than previously. Housing remains depressed. Inflation has moderated and inflation expectations remain stable. In different circumstances, the more positive U.S. labor and consumption data might have set a more buoyant tone to today’s announcement. The statement appears careful not to diminish concern about possible spillover effects from Europe. Voting against today’s action was Chicago Federal Reserve Bank President Charles Evans, who would have preferred to see additional policy accommodation.
At te next scheduled FOMC meeting, a 2-day meeting over January 24 and 25, expect to hear more about a new communications strategy by the FOMC. A post-meeting press conference by Chairman Bernanke in January could focus on new communication initiatives. Perhaps the Fed will give more forward guidance on targets for inflation, unemployment, and/or the size and composition of their balance sheet. Fourth quarter U.S. economic data should continue to be positive and, barring a European catastrophe, the FOMC will not initiate new monetary policy in January. Additional quantitative easing remains on the table, but may turn out to be the card that is not played, and that would be a better outcome for the Fed. Much depends on Europe.
Market Reaction: Equity markets fell after the Fed announcement which disappointed those expecting more easing. Treasury yields are down at the long end of the yield curve. Oil is trading at $100/barrel. The dollar is up against the yen and the euro.