The Federal Reserve just released its latest policy statement following a two-day meeting. Chairman Bernanke is holding a press conference to discuss the meeting and the future course of monetary policy.
Below we present the current statement, along with the statement from the September 21st meeting, broken out paragraph by paragraph. My interpretation/translation from "central bankerese" is interspersed.
The fed funds rate in the 0 to 0.25% range has been pledged to be kept through the middle of 2013. Not a lot of change this time around. A slightly more positive outlook, but no new steps are being taken to get the economy going again.
"Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.
"Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable."
"Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased.
"Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable."
The Fed is a bit more optimistic in its outlook this time around. The temporary factors that were slowing growth, such as the supply chain impact of the Japanese disaster, are wearing off. No change in the outlook or assessment of the labor market; it was lousy at the last meeting and remains so.
In line with other data, such as the third quarter GDP report and the Personal Income and spending reports over the last few months, the consumer has picked up the pace of spending. However, it is worth noting that it has only happened through a sharp decline in the savings rate. One has to question the sustainability of a spending surge that is not supported by income growth, particularly wage and salary growth.
No real change in the investment components of GDP. Spending on equipment and software continues to grow, but construction spending — both residential and non-residential — showing no real signs of recovering. The outlook for inflation remains low, both in the short term and in the longer term.
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.
"Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations."
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.
"Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations."
The first sentence is pure boilerplate. The Fed is just following the law that authorizes it to exist in the first place. The question is: how well is it doing on each side of the mandate? In my estimation, good on the inflation front, and terrible on the full employment front. Further, the Fed expects both these trends to continue.
"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
"The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."
"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.
"The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction."
Nothing new this time — just telling you that they are implementing the things they have put into place in the last two meetings.
"The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
"The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
A simple cut-and-paste from the last statement.
"The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability."
"The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate."
In other words, the Fed is saying, "Maybe sometime in the future we will decide to actually do some more to help on the unemployment front." To be fair, the Fed has done more than the rest of the policy making powers thus far. More fiscal stimulus, or at least prevention of massive fiscal contraction would be more helpful in getting the economy going than additional monetary easing.
The problem is not the cost of capital (or fears of additional regulation and taxes) that is holding back employment growth. It is a lack of aggregate demand.
"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time."
"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time."
One dissent this time instead of three in the last two meetings, but the shift is bigger than that. Last time the dissents were against doing anything to help on the getting the economy moving again. This time they decided to ignore the full employment side of the mandate and not do anything new, and Charles Evans dissented.
It seems to me if unemployment is too high and inflation is low, you loosen up monetary policy. If unemployment is low and inflation is high or accelerating, you tighten up. Since the Fed can no longer use its standard policy tool of lowering the Fed Funds rate (it has been pegged at near zero for almost three years now), it has to resort to unconventional tools.
Ironically, Bernanke, back when he was an academic, was the one who laid out the steps to take when the economy was stuck in a rut and was up against the 0% lower bound of short-term interest rates. Professor Bernanke would have approved of allowing for a bit more inflation and would have been all in favor of QE3 at this point.
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