The Fed left interest rates unchanged near zero and reiterated that exceptionally low levels for the Fed funds rate can be expected through late 2014. Given the apparent weaker economic backdrop, new initiatives were widely expected, and the FOMC delivered some relief but no quantitative easing (QE). The Fed decided to extend the average maturity of its holdings by extending Operation Twist (which was due to end this month) by $267 billion through the end of the year. The FOMC intends to purchase Treasury securities of 6 years to 30 years while selling shorter term securities.
The FOMC also decided to maintain its policies of reinvesting in agency mortgage-backed securities the principal payments from such holdings. As in April, the decision was not unanimous, with the more hawkish Jeff Lacker the only dissenter. Warranting the above-mentioned extra stimulus, was a softer economic picture. The Fed acknowledged that growth in employment has slowed and that household spending seems to be rising at a slower pace than earlier in the year. The Fed also continues to see strains in global financial markets as providing downside risks to its outlook.
The FOMC also updated its economic projections which showed an expected downgrade for this year and a next. The central tendency forecast for GDP growth (Q4/Q4) is now 1.9-2.4% in 2012 (versus 2.4-2.9% previously). The estimate is 2.2-2.8% for 2013 (versus 2.7-3.1% previously) and 3.0-3.5% for 2014 (3.1-3.6% previously). The projection for the unemployment rate was, not surprisingly, revised higher: 8.0-8.2% for 2012 (versus 7.8-8.0% previously), 7.5-8.0% for 2013 (7.3-7.7% previously) and 7.0-7.7% for 2014 (6.7-7.4% previously).
There were downward changes to the inflation projections (both PCE and core), although those remained close to the Fed's 2% target, particularly for 2013 and 2014. While there's no information about voting and non-voting members' views (except perhaps for Jeffrey Lacker), the FOMC presented information about how participants feel about the pace of policy firming going forward. Of the 19 participants (up from 17, with the addition of two new members), three thought that policy firming was appropriate this year (same as back in April) although none of the them now see rates going past 0.75%. Three more saw the start of tighter monetary policy as warranted next year (same as last April).
Seven view it only by 2014 (unchanged from April) while six participants see rate hikes starting only in 2015. Yet more than half of the FOMC members now see rates remaining below 1% by 2014 (compared to 41% of members last April). FOMC members view that the fed funds rate should be in the 3.0-4.5% range over the longer run. The information about the participants' views on the appropriate pace of policy firming clearly convey a more dovish Fed. The central tendency forecast is slightly above our own call for US growth, but consistent with more stimulus as provided today.
In the press conference, Chairman Bernanke defended the Fed’s actions (viewed by some as too timid) by saying that the new measures represented a “substantive step.” He reiterated the FOMC’s views that more action would be forthcoming in case the economy, particularly the labour market, doesn’t improve. Yet the Chairman pointed out that the FOMC would need to do a cost benefit analysis of non-standard measures. Having exhausted Operation Twist by year end (since there won’t be any more short-term securities to sell for a while), alternative policy tools will have to be considered by the Fed. In that regard, the Chairman pointed out that the FOMC will be following with interest developments regarding the Bank of England’s proposed “funding for lending scheme” whereby the central bank makes funding available to banks conditional to sustaining or expanding their lending activity to the nonfinancial sector.
Bottom line: With Operation Twist originally planned to come to an end this month, markets were eagerly looking for some new stimulus and the FOMC threw them a bone for now, while promising more action later should things deteriorate further. That should disappoint some who were wishing for a more aggressive Fed through quantitative easing or at least a more targeted intervention on mortgage backed securities. US economic data, while not stellar, haven't been horrible either, being consistent with slow but positive growth. That's likely the reason why the Fed is adopting a cautious approach. More aggressive Fed action (e.g. QE3) is probably being saved for later, in case downside risks materialize. Yet, we noticed that once the maturity extension program will be completed by the end of 2012, the Fed will hold almost no securities maturing through January 2016. Having squeezed Operation Twist until the last drop, the Fed’s next moves could require an expansion of its balance sheet.
The FOMC also decided to maintain its policies of reinvesting in agency mortgage-backed securities the principal payments from such holdings. As in April, the decision was not unanimous, with the more hawkish Jeff Lacker the only dissenter. Warranting the above-mentioned extra stimulus, was a softer economic picture. The Fed acknowledged that growth in employment has slowed and that household spending seems to be rising at a slower pace than earlier in the year. The Fed also continues to see strains in global financial markets as providing downside risks to its outlook.
The FOMC also updated its economic projections which showed an expected downgrade for this year and a next. The central tendency forecast for GDP growth (Q4/Q4) is now 1.9-2.4% in 2012 (versus 2.4-2.9% previously). The estimate is 2.2-2.8% for 2013 (versus 2.7-3.1% previously) and 3.0-3.5% for 2014 (3.1-3.6% previously). The projection for the unemployment rate was, not surprisingly, revised higher: 8.0-8.2% for 2012 (versus 7.8-8.0% previously), 7.5-8.0% for 2013 (7.3-7.7% previously) and 7.0-7.7% for 2014 (6.7-7.4% previously).
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There were downward changes to the inflation projections (both PCE and core), although those remained close to the Fed's 2% target, particularly for 2013 and 2014. While there's no information about voting and non-voting members' views (except perhaps for Jeffrey Lacker), the FOMC presented information about how participants feel about the pace of policy firming going forward. Of the 19 participants (up from 17, with the addition of two new members), three thought that policy firming was appropriate this year (same as back in April) although none of the them now see rates going past 0.75%. Three more saw the start of tighter monetary policy as warranted next year (same as last April).
Seven view it only by 2014 (unchanged from April) while six participants see rate hikes starting only in 2015. Yet more than half of the FOMC members now see rates remaining below 1% by 2014 (compared to 41% of members last April). FOMC members view that the fed funds rate should be in the 3.0-4.5% range over the longer run. The information about the participants' views on the appropriate pace of policy firming clearly convey a more dovish Fed. The central tendency forecast is slightly above our own call for US growth, but consistent with more stimulus as provided today.
In the press conference, Chairman Bernanke defended the Fed’s actions (viewed by some as too timid) by saying that the new measures represented a “substantive step.” He reiterated the FOMC’s views that more action would be forthcoming in case the economy, particularly the labour market, doesn’t improve. Yet the Chairman pointed out that the FOMC would need to do a cost benefit analysis of non-standard measures. Having exhausted Operation Twist by year end (since there won’t be any more short-term securities to sell for a while), alternative policy tools will have to be considered by the Fed. In that regard, the Chairman pointed out that the FOMC will be following with interest developments regarding the Bank of England’s proposed “funding for lending scheme” whereby the central bank makes funding available to banks conditional to sustaining or expanding their lending activity to the nonfinancial sector.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.
Bottom line: With Operation Twist originally planned to come to an end this month, markets were eagerly looking for some new stimulus and the FOMC threw them a bone for now, while promising more action later should things deteriorate further. That should disappoint some who were wishing for a more aggressive Fed through quantitative easing or at least a more targeted intervention on mortgage backed securities. US economic data, while not stellar, haven't been horrible either, being consistent with slow but positive growth. That's likely the reason why the Fed is adopting a cautious approach. More aggressive Fed action (e.g. QE3) is probably being saved for later, in case downside risks materialize. Yet, we noticed that once the maturity extension program will be completed by the end of 2012, the Fed will hold almost no securities maturing through January 2016. Having squeezed Operation Twist until the last drop, the Fed’s next moves could require an expansion of its balance sheet.
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