FOMC Preview: Fed on Hold

Published 12/12/2011, 09:34 AM
Updated 05/14/2017, 06:45 AM
The Fed meeting on Tuesday is expected to be a non-event with no changes to policy and limited change to the language.

The change to the FOMC’s communication policy that is currently under way will probably not come at this meeting. It is likely to come at a two-day meeting followed by press conference – probably in January 2012.

Stronger data keeps Fed on the sideline

Economic data has continued to improve, with ISM manufacturing climbing higher again and non-farm payrolls growing a little above trend, pushing the unemployment rate down. Consumer spending is also on a stronger path. Q4 GDP is now tracking 2.5-3.0%. This confirms the picture of a gradual strengthening of the economy following the downturn in H1 which was due to temporary factors. With little change in the economic outlook, the Fed is expected to stay sidelined for now.

The statement - very few changes expected

We do not expect any material changes in the statement. Neither the economic situation nor the inflation situation has changed much since the previous meeting a little over a month ago. 

The main uncertain factor is whether the Fed will change the communication strategy at this meeting. However, we doubt this as it would be more natural to introduce the new strategy at a meeting followed by press conference, which is not the case with this meeting. Instead, the two-day January meeting could be a more obvious time to present a new communication strategy. The change in strategy – when it comes – could involve a path for interest rates in order to signal the Fed’s rate expectations and help anchor longterm bond yields.

Policy outlook: Lower inflation increase room to manoeuvre

Overall we do not expect further stimulus measures from the Fed in terms of QE3. However, if the recovery runs into new headwinds in 2012, the Fed will have increasing room to manoeuvre as we expect core inflation to decline during 2012. What is likely is also that the Fed changes its language in the statement on the period of how long it expects rates to be exceptionally low. When the Fed changes its communication strategy – most likely in January, in our view – it will probably change the language that rates are expected to be exceptionally low through to the middle of 2013.  

FOMC statement from 2 November 2011

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. 

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 towards 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.  

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. 

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. 

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.

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