FOMC Holds Its Course, Expectations Still Elevated for June Meeting
- According to today’s FOMC policy announcement, Fed policy will remain unchanged from March 13.
- The FOMC remains committed to a zero interest rate policy through late-2014.
- According to the FOMC, the U.S. economy has been expanding moderately, and will continue to do so.
- The inflationary impact from higher oil and gasoline prices is expected to be temporary.
- Strains in global financial markets continue to pose significant downside risks.
- “Operation Twist” continues as announced last September.
- New Orders for Durable Goods fell by 4.2 percent in March as commercial aircraft orders lost altitude.
- The Mortgage Applications Composite Index declined by 3.8 percent for the week ending April 20.
With minimal changes in their policy announcement from the previous one on March 13, the Federal Open Market Committee today left expectations elevated for their next scheduled announcement on June 20. Today’s press release was minimally different from the March release; if anything, slightly more positive in its assessment of the U.S. economy. Fed funds policy remains as before, with the pledge to keep the fed funds rate exceptionally low at least through late 2014. The FOMC judges the U.S. economy to be expanding moderately, and expects that moderate expansion will continue over coming quarters, giving way to a gradual pick-up in activity. Signs of improvement in the housing sector were acknowledged but the sector remains depressed according to the FOMC. The unemployment rate is expected to decline gradually. Inflation will remain at or below acceptable levels even with the recent push from higher oil and gasoline prices. Strains in global financial markets still represent a significant downside risk to the U.S. according to the FOMC. The Federal Reserve’s program of extending the average maturity of its securities holdings, Operation Twist, will continue into June. As in March, the voting showed one dissent. Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, does not agree that the fed funds rate should stay exceptionally low through late 2014. Today’s “place holder” announcement should come as no surprise. It was very unlikely that the FOMC would initiate new policy on top of its existing Operation Twist, unless economic conditions had significantly deteriorated. Today’s announcement does nothing to reduce expectations for additional monetary policy measures in June. Better-than-expected economic data between now and June 20 reduce the odds of more quantitative easing. Worse-than-expected data increase the odds. One telling clue to the FOMC’s intentions comes from the recent excursion in long bond yields from March into early April. The FOMC will not want to see long yields snap back at the conclusion of Operation Twist in June. The committee is motivated to keep mortgage interest rates very low. Another round of quantitative easing focused on keeping mortgage rates low would buy more healing time for the still-impaired housing market and set the stage for increased economic momentum in 2013.
New orders for durable goods fell by 4.2 percent in March as volatile commercial aircraft orders declined by 47.6 percent. A “core” measure, nondefense capital goods excluding aircraft, fell by a less dramatic 0.8 percent. Metrics for the manufacturing sector are not as strong as they were in late 2011, but they are also not universally bad. Recent data has been mixed, perhaps due to normal noise. However, a downshift in global growth may be showing up here at home. Mortgage apps for the week ending April 20 declined by 3.8 percent as the purchase index gained 2.7 percent while the refi index fell 5.6 percent. The recent small cycle in mortgage interest rates may have kept some buyers away in early April.
Market Reaction:U.S. equity indexes held on to gains through the FOMC announcement. Treasury yields rose at long end of the yield curve. Crude oil is up to $103.90/barrel. The dollar is down against the euro and up versus the yen.