Today the Federal Reserve finished its first meeting of the year, and as was almost universally expected, they kept the Federal Funds Rate at a range between 0 and 0.25%. Below I present the current policy statement and the policy statement from the December 14th meeting on a paragraph by paragraph basis. I also provide my interpretation/translation.
“Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
“Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls.
“The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”
“Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.
“Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls.
“The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.”
Not a lot of change here, just a rhetorical shift from “bring down unemployment” to “improvement in labor market conditions.” Those pretty much mean the same thing, although labor market conditions is a bit broader than unemployment alone.
The tone on consumer spending is a bit more upbeat, but the factors constraining it are the same. A bit more upbeat on the pace of business investment spending, which has been shouldering a large part of the load in creating actual economic growth over the last year.
Investment in structures, both residential and non-residential is still very weak, although we did get a nice bounce in new home sales this morning. The absolute level of housing sales is still extremely depressed.
Historically, the housing sector has been the locomotive that has pulled us out of recessions. That locomotive is still derailed. While they make a nod to higher commodity prices, the outlook for inflation is still seen as extremely benign.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.”
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.”
A word for word “cut and paste” from the December statement. Both mandates are running “too cold” and the appropriate policy response is an easier monetary policy. Note that this is very different from “stagflation” days when the two main policy objectives were in conflict.
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November.
“In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings.
“In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
With short term interest rates already as low as they can go, the Fed has had to turn to other methods to comply with its dual mandate. Principal among these is QE2, or the purchase of $600 billion in longer-term T-notes. A little bit of change in language (a bit less specific about the pace of purchases) but no change in policy indicated.
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
Again, a direct “cut and paste” from the December statement. The key phrase “exceptionally low levels for the federal funds rate for an extended period.” How long is “an extended period?” That is not specified, but I would be extremely surprised if the Fed Funds rate were to be increased at all in calendar year 2011.
“The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”
“The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”
Standard boilerplate and unchanged. I think this paragraph has been more or less been unchanged in every policy statement since Paul Volcker was Chairman (no, I did not go back and check). It would be pretty shocking news if the Fed did not continue to monitor the economic outlook and financial developments. Isn’t that what we pay them to do?
“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.”
“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
“Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”
Each year the composition of the Fed Open Market Committee changes a bit as not all the regional governors are on the committee. The only regional governor with a permanent seat is the head of the NY Fed. Tom Hoenig, the perpetual dissenter last year, no longer has a vote. With him out of the way, the decision was unanimous.
While I am not against dissent on the Fed per se, I strongly disagreed with Hoenig. Given that both objectives point to the need for an accommodative monetary policy, advocating a tighter policy would have been a grave mistake, and if followed would have probably caused a double-dip recession. From my point of view, Mr. Hoenig will not be missed on the committee this year.
Overall, there was very little that was new in this policy statement. At the margin, the Fed seems a bit more upbeat about the prospects for the economy, but the change is not big enough to prompt any change in policy, and don’t look for any policy changes in the near future. We are likely to be on the same course through at least the middle of the Summer (by then QE2 should be completed).
Based on the current statement and economic conditions, I would not expect a QE3. On the other hand, it seems to me to be very unlikely that the Fed Funds rate will go up this year.
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