09 August 2011

Federal Open Market Committee Pledges Monetary Easing Through 2013 If Required

About what one might have expected.

No specific action at this time, but reassurances that the Fed recognizes the downturn in the economy, with fresh evidence of this since their last meeting in June, and higher risks to recovery through lack of confidence in financial assets, and slack employment and spending by consumers.

In a very real sense the Fed is attempting to bridge the gap between fiscal and monetary policy, given the inadequate response from the federal government to the financial crisis. 
The Fed changed the wording from 'extended period' to 'through 2013.'   I had expected them to say 2012 but since this is not a binding limit it is of little consequence, except to signal that the upcoming presidential election will not deter them from taking what they believe to be the necessary steps to maintain the financial system.  Default may be all right with some, but the Fed apparently does not concur.

There were three dissenting votes, from Plosser (Phila), Kocherlakota (Minn), and Fisher (Dallas), based according to reports primarily on this statement regarding longer term easing based on economic conditions.
"...are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
I tend to think that their dissent, if based solely on this, represented some sort of intellectual stand, as the statement clearly represents no firm commitment to rate policy, but is intended to put some meat in the reassurance.   There is recent precedent for this approach in other central banks.  It is intended to convey intent to reassure the longer term horizon of business decision, but is clearly not a commitment.

And if the dissent was based on a desire to RAISE rates, which I highly doubt, I would think that those governors might be operating in some alternate universe with different relationships and conditions. I am open to contrary arguments, but it is most likely that a desire to raise rates would be based on some ideological persuasion or first principle rather than on sound economic theory.  

The dissenting votes may feed into the 'no confidence' in the governance of the country based on ideological differences and zombie economic theories that continue to hinder real recovery. 

But at the end of the day it is official acknowledgement of the weakness of the economy, and easy money as needed through 2013. The markets will most likely recover from these extreme short term trends, barring new difficulties, especially from Europe.   How robust that recovery will be is another matter.  The inability to reform is a significant impediment to growth and a return to normalcy.

Whether any sort of a sustained rally of more than a few days ensues is another matter.  The system appears to be broken, corrupt, and dysfunctional.  The solution may not appear until the suffering becomes more widespread, shaking the fortunate out of their comfortable complacency.

I should add here that if the equity market does not respond sufficiently on the announcement, we may see the entry of the Exchange Stabilization Fund and its house banks, either into the close or tomorrow. They tend to do this to reinforce some Fed action if the market does not respond on its own.  This is view as benign, similar to jawboning, the 'management of perception.'

Federal Open Market Committee
Release Date: August 9, 2011

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier 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 now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. 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 promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee 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 will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

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 these tools as appropriate.

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 would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.