As was universally expected, the Fed kept the Fed Funds rate at a range between 0 and 0.25%, where it has been since the worst of the Financial meltdown two years ago. Below, I present the current Fed policy statement, and the Fed statement from the November 3rd meeting on a paragraph-by-paragraph basis, with my interpretation/translation mixed in.
“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.”
“Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, 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.
“Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.”
The major difference here is subtle with the description of the pace of growth moving from “slow” to continuing but “insufficient to bring down unemployment.” That is a pretty good functional definition of positive — but too slow — growth. However, I would interpret it as a slight upgrade to the Fed’s view of the economy.
Similarly, “increasing at a moderate pace,” is a bit of an upgrade when it comes to household spending from “increasing gradually” although the restraining factors remain the same. The only other change here is a bit of an expansion of the scope of the housing sector problems to the whole sector rather than just housing starts.
However, from an economic growth point of view, housing starts are the most important part of the housing sector. The difference between the two statements might mean that they are thinking about the effects of the renewed downturn in housing prices and the adverse wealth effect that could have on the economy, and also the possibility of it leading to more foreclosures. Overall, though, I sense a bit of an upgrade in the view of the economy as we move into 2011.
“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.”
No change at all. Inflation is not the problem, unemployment is. The policy response to both parts of the mandate leans in the same direction, and does not pose a conflict. Easier monetary policy will head off potential deflation, and will help, at least at the margin, in bringing down unemployment.
“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.”
“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 expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings.
“In addition, the Committee intends to purchase a further $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.”
The Fed is comfortable with the decision they made last month to launch QE2, and will continue the program they announced at the last meeting. If I were in the meeting and had a vote, I would also go along with QE2, but I would not oversell its likely impact.
One of the most important channels that QE2 will work through is by weakening the dollar, and thus help net exports by making our exports more competitive, and imports more expensive, which will lead people at the margin to buy domestically produced alternatives where they exist, or to simply buy fewer imported goods.
It is almost impossible to see how we can get the trade deficit under control without the dollar falling. In the short term, the trade deficit is a far more serious economic problem than is the budget deficit. In the long term, both deficits have the potential to cripple the economy.
“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.”
As was universally expected, no change in the Fed Funds rate. It can’t go any lower, and raising it in the face of 9.8% unemployment and very low inflation, particularly at the core level, would be, for the lack of a more sophisticated word, STUPID. Further, the Fed expects that it will keep the Fed Funds rate at the current minimal level for a long time. That probably means at least until the end of 2011, if not longer.
A credible pledge to keep short-term rates low for a long time can help keep longer term interest rates low. For an easy example, someone looking to invest safely for two years could either buy a 2 year T-note or a one year T-bill, and then roll it over after a year. Pledging to keep the rate on the one-year bill low for a long time will thus reduce the yield on the two year note as well.
The analytical process can be extended out to ten or even 30 years as well following the same logic. The 10-year note is the rate that is most closely tied to 30 year mortgages due to the likelihood of early payment on mortgages.
“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 that has been in every Fed statement that I can remember. It would be shocking if the Fed said it was not going to monitor the economy and do its legally mandated job of trying to support full employment and stable prices.
“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 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.”
“Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”
Tom Hoenig again stands out as the naysayer. I think he is not only wrong, but dangerously wrong here. The problem is clearly high unemployment, not high inflation, and I see little risk of run away inflation in the medium term (none in the short term). This will be Mr. Hoenig’s last dissent, as starting next month he will no longer be a voting member of the FOMC. However, some of the other regional Fed presidents have similarly hawkish views, so we might see other dissents in the future.
Overall, this report was almost exactly what the market was expecting and represents no change of any significance from the last policy statement, other than possibly a slight upgrade to the Fed’s assessment of the current and near term future growth rate of the economy. The operative word there would be “slight.”
Zacks Investment Research
