Posted on Wednesday, 27th April 2011 by Charlotte W
FOMC Statement: April 27
Bernanke’s press conference unveils FOMC forecasts earlier than usual
The Federal Reserve unveiled a statement characterizing the economy as displaying moderate growth overall, but still facing challenges in a depressed housing market. Labor market conditions are improving gradually, while consumer spending and business outlays on equipment and software remain robust. Indicators of excess resource slack are still elevated. FOMC members believe that recent rises in commodity prices will impart a transitory effect on the headline rate of inflation, with limited pass-through in the long run to measures of underlying inflation. In particular, FOMC members still view underlying measures of inflation as “subdued” and longer-term inflation expectations remain consistent with the Federal Reserve’s dual mandate. The statement explicitly indicates that the Federal Reserve will complete its current large-scale asset purchase (LSAP) program at the end of 11Q2. Reinvestment of principal from maturing assets will continue until financial and economic conditions warrant a change in policy stance. The FOMC kept the Fed Funds target rate at between 0.0 and 0.25.
For the first time in the history of the Federal Reserve, the Chairman followed the meeting with a press conference. In our view, the press conference allows the Federal Reserve to more clearly articulate its economic forecast to the public, improve the transparency of the central bank’s operations, and also provides a new method upon which to transmit its communications strategy. During the press conference, the Chairman detailed a slight downgrade of the FOMC’s GDP forecast due to less defense spending, weaker construction and higher oil prices. The higher oil prices also triggered a slight increase in the FOMC’s inflation forecast, but the Chairman emphasized that he will maintain a close watch on survey and market-based measures of inflation expectations. The Chairman also said the end of LSAP will not significantly affect interest rates. LSAP’s success is evident in ameliorated spreads and volatility. He sees no need to taper purchases. With regard to the exit from extraordinarily low monetary policy, the Chairman said the cessation of reinvestment of principal would be one of the first steps. Notably, he mentioned that he would change the statement wording regarding “extended period” a couple of meetings before the first rate hike.
Bottom line: uncertainty over sustainability of the recovery to weigh on policy action
Today’s statement and press conference are consistent with our previous Fed Watch outlining the expected Federal Reserve exit strategy. In particular, it confirms our assessment that the Fed will complete LSAP as planned and with no tapering. Our supposition that reinvestment represents the first stage of the exit strategy is also confirmed by today’s press conference. Our belief that the central bank would drop the “extended” phrasing for the statement around January (or in the previous meeting) is also confirmed by the Chairman’s comments today. Overall, the Fed remains in no rush to raise interest rates as a result of excess resource slack, although it is increasingly focused on the evolution of measures of inflation expectations. Due to uncertainty over the sustainability of the recovery, the timing of policy actions (balance sheet normalization, in particular), will depend on the evolution of data over the summer. We continue to expect a first rate hike in March 2012.
Similar Posts:
- FOMC Statement: December 14
- We expect FOMC to raise rates in 3Q11
- FOMC Meeting Preview: no fireworks
- FOMC minutes: more downbeat but the bar is set high for further QE
- US: Ahead of the Fed
Tags: Press
Posted in Business Quotes | No Comments »