FOMC’s Tone Improves, No Changes to Policy
- According to today’s FOMC policy announcement, Fed policy will remain unchanged from January 25.
- The FOMC remains committed to zero interest rate policy through late-2014.
- U.S. economic conditions improved through early 2012.
- Recent higher petroleum prices are not expected to last. Inflation is expected to remain in acceptable range.
- Strains in global financial markets still pose significant downside risks.
- “Operation Twist” continues as announced last September.
- February Retail Sales increased by a strong 1.1 percent, nudging up expectations for 2012Q1 GDP.
The Federal Reserve remains in watchful waiting mode. At today’s meeting of the Federal Open Market Committee no changes were made to current monetary policy. The FOMC maintained its commitment to keep the fed funds rate at exceptionally low levels through late 2014. The FOMC also decided to continue its program of extending the average maturity of its holdings (Operation Twist) as announced last September. In September it was announced that Operation Twist would run through June 2012. In its assessment of current economic conditions, the FOMC acknowledged recently improved labor market conditions and gains to household spending and business investment. The FOMC continues to look past the current flair-up in petroleum prices and judges it to be temporary in nature, with inflation expected to run at or below the Fed’s 2 percent target over the longer term. Looking abroad, the FOMC said that strains in global financial markets have eased, but they continue to pose significant downside risks. No mention was made of possible future monetary policy actions. The sole dissenting vote was by Jeffrey Lacker of the Richmond Fed, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the fed funds rate through the end of 2014. This was a more optimistic assessment than we saw in the January 25 announcement. But it does not eliminate the possibility of further monetary policy action, such as quantitative easing, later this year, if conditions deteriorate from here. Right now it is all about current conditions, and the data have been getting better.
A timely example of better data came this morning with the release of the February retail sales report. Total retail sales increased by 1.1 percent for the month. Strong car sales helped for the right reasons, but so did stronger gasoline sales (helping for the wrong reasons). Auto dealer sales were up by 1.9 percent as unit sales hit a 15.1 million unit annual rate, the strongest monthly sales rate since the onset of the Great Recession. Gasoline station sales were up 3.3 percent on prices increases as the national average unleaded gasoline price broke through $3.50/gallon in mid-February. Clothing store sales were up 1.8 percent in February and building materials dealers gained 1.4 percent. The only consequential negative came from furniture sales, down 1.2 percent. Who would stuff furniture into their new car? Stronger than expected retail sales in February implies firmer consumer spending for the almost complete first quarter, nudging up estimates of Q1 GDP. In our soon-to-be published March U.S. Economic Update we have real GDP growth for 2012Q1 at 2.2 percent, annualized.
Market Reaction: U.S. equity markets are liking the Fed’s cooking, extending rallies after today’s policy announcement. Treasury yields are up at the long end of the yield curve but will likely be twisted down again, bringing the 10-Year Treasury bond rate back closer to 2.0 percent, from its current 2.11. Crude oil is up to $106.87/barrel, but the FOMC judges this to be temporary. The dollar is up against the euro and the yen.