Posted on Tuesday, 7th December 2010 by Charlotte W
The next FOMC meeting is the final one of 2010 and is likely to yield a statement not significantly different from the one issued on November 3rd, excluding the announcement of the large-scale asset purchases. This time around there should be no fireworks.
In the weeks since the previous meeting, most District Bank Presidents have taken the opportunity to speak in public about the LSAP programme. It may be doing an injustice to some carefully nuanced positions to flatly say that any given President is for or against the programme, but there are some sharp differences among the 12. Additionally, Governor Kevin Warsh has also expressed some concerns publicly, and given only qualified support. Nonetheless, for the near term the FOMC’s policy is to maintain the fed funds rate target at 0%-0.25%, rollover maturing securities and prepayments from the current portfolio, and to buy another $600 billion in longer-term Treasury securities through the end of the second quarter 2010.
I anticipate that the FOMC will affirm the prior announcement of $600 billion of longer-term Treasury securities, and within the originally announced time frame. The last statement said, “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.” There have been no developments in the economic data or financial markets that would call for any changes at this early stage. It is possible that the Committee will acknowledge that the stated intent of keeping rates low has been challenged since the announcement was made in early November. Many analysts anticipated that the market had already ‘priced in’ the Fed’s intentions, and did so for longer maturities than the Fed actually announced. There was some initial adjustment to this in the days immediately following the announcement. Then Treasury markets were thrown by renewed turmoil in European sovereign debt markets. This appears to be subsiding. However, in the end this is a months-long effort to provide additional easing, and the Fed will take the long view on the success or failure of the LSAP program. It is far too early to determine its effectiveness.
I expect the language regarding the economic and inflation assessments to be much the same. The last report said, “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.”
Data on the housing market appears to have deteriorated somewhat in the intermeeting period, but measures for the business sector are improving. Consumer confidence is on the rise, albeit from low levels. The data on the labour market is mixed with falling jobless claims, but few gains in payrolls and unemployment still high. Inflation data is still consistent with quite subdued rates. While inflation expectations have inched higher, it is after a dip in recent months. Overall inflation expectations remain looooooow and well anchored.
In the last statement, the FOMC linked the LSAP decision as one to “foster maximum employment and price stability.” The Committee always considers the impact of policy on both sides of the dual mandate, but the statement issued on November 3 treated the policy as prescriptive for both issues at hand: a sluggish economic recovery that was not creating enough jobs to pull down the unemployment rate with acceptable speed, and subdued inflation that could slip into deflation. Given the outcry in the wake of the FOMC’s decision, particularly in regard to fears of overheated inflation, the statement may make some reference to the tools developed to exit the first round of asset purchases. Fed officials have consistently said the central bank has the tools to manage the exit from the immense balance sheet without igniting inflation. This is true whether the individual policymaker agreed with the asset purchase programme or not. As noted above, the December 14th meeting will be the last scheduled one in 2010. I anticipate that Fed policy is going to be ‘stable’ for at least the next few months and remain convinced that the Fed will not raise rates until ‘at least’ 1Q 2012.
In the last statement, the FOMC linked the LSAP decision as one to “foster maximum employment and price stability.” The Committee always considers the impact of policy on both sides of the dual mandate, but the statement issued on November 3 treated the policy as prescriptive for both issues at hand: a sluggish economic recovery that was not creating enough jobs to pull down the unemployment rate with acceptable speed, and subdued inflation that could slip into deflation. Given the outcry in the wake of the FOMC’s decision, particularly in regard to fears of overheated inflation, the statement may make some reference to the tools developed to exit the first round of asset purchases. Fed officials have consistently said the central bank has the tools to manage the exit from the immense balance sheet without igniting inflation. This is true whether the individual policymaker agreed with the asset purchase programme or not. As noted above, the December 14th meeting will be the last scheduled one in 2010. I anticipate that Fed policy is going to be ‘stable’ for at least the next few months and remain convinced that the Fed will not raise rates until ‘at least’ 1Q 2012.
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Tags: Fomc Meeting, Meeting
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