The Federal Reserve just wrapped up its first Open Market Committee meeting of the year, and as was widely expected, there was no change to the Fed Funds rate that has been locked in a 0-0.25% range since December 2008. Below I present both the current policy statement and the previous policy statement (12/13/11) with my commentary/translation interspersed.
"Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated.
"Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable."
"Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.
"Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable."
Looks like a straight cut-and-paste job from the previous statement — the only change being substituting the word “November” with “December.”
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate."
"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. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations."
Not much change here other than a subtle shift towards describing the growth outlook as “modest” rather than at a “moderate” pace. The noticeable change is dropping the line about paying close attention to the evolution of inflation and inflation expectations. While I am sure that they will continue to do so, dropping the line suggests that they are less concerned about any near-term or even medium-term acceleration in inflation. Thus this is a more “dove-ish” statement than the last one.
"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today 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 late 2014."
"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."
This is the big news. Previously the Fed had only “promised” to hold rates near zero through the middle of 2013, now we are looking at the end of 2014 as the time for the first rate hike. That should keep rates low not just for very short term rates, but well into the intermediate part of the curve, with big affects on the maturities up to about five years.
"The Committee also decided 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 promote a stronger economic recovery in a context of price stability."
"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 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."
A few interesting things here. First, the Fed dropped its boilerplate “continue to asses the economic outlook” language. While I’m sure that they still will, that language has been in every Fed statement I can remember, so I’m not really sure what to make of its absence. Since they already indicated above that the Fed Funds rate would stay where it is until 2014, they didn’t really need to reiterate that they are not changing it at this meeting.
"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate."
"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."
One dissent last time and one this time — but very different dissents. Last time Charles Evans wanted the Fed to be more aggressive in helping to jump start the market, and the lengthening of the time that the market knows that Fed Funds will be at rock bottom is a move toward a more accommodative stance.
In contrast, this time Jeff Lacker wanted the Fed to stay a bit more opaque about its policy. It strikes me that he lost that battle last summer when they set the original target date of mid-2013. I like the extending of the low interest time period, and I suspect that the markets will agree. However, the market will be listening very closely to what Bernanke has to say at his press conference this afternoon.
I personally think it is an easy call. Inflation is very low, the headline CPI is actually down slightly over the last three months, and the core CPI is running at only 1.6% annualized over that period. Market-based indicators like the overall level of interest rates — even long-term rates — and the spread between TIPS and regular treasuries of the same maturity point to low inflation going forward. This is coupled with a still extremely high (but falling) unemployment rate.
Just about any macroeconomics textbook would tell you we need monetary policy to be accommodative. The Fed can’t cut the Fed Funds rates any further, and have not been able to do it for over three years now. Thus they have had to fall back on less conventional tools.
Making clear that they intend to keep rates low for a longer time will put downward pressure on intermediate rates, and that will help stimulate the economy. It also avoids a further expansion of the Fed balance sheet (QE), which has been the Fed’s other main unconventional tool. I don’t think that QE3 is off the table, but it seems the Fed decided to keep that powder dry for the time being, just in case Europe really hits the fan.
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