Mixed Messages from the Fed

March 15, 2011

Today’s FOMC Statement contained some new ideas, retained long-familiar points, acknowledged higher inflation and a firmer recovery, held to existing policy, produced at least one surprise for me, and was supported by a vote with no dissent.

My biggest surprise was the lack of any allusion to Japan’s crisis.  Not a single word about it can be found.  All equity markets fell strongly today.  In Japan, the drop is comparable to the U.S. crash of 1987.  Six days after the terrorist attack of 09-11-01, the FOMC cut rates by 50 basis points and released a statement promising to “supply unusually large volumes of liquidity to the financial markets, as needed, until market functioning is restored.”  For the Japanese still-evolving crisis to not even get mentioned signals that officials do not expect it to affect future policy whatsoever.

Here’s what officials did note:

  • The overall recovery and labor market conditions are in better shape.
  • Upward pressure on inflation has been generated by rising commodity prices, but long-term inflation expectations haven’t budged.
  • Core inflation, which in January was “trending downward,” was upgraded to now being “subdued.”
  • This flurry of inflation is expected to be transitory, but the future “evolution of inflation and inflation expectations” will be monitored closely.
  • The Fed’s dual mission of maximizing employment and promoting price stability is still missing the mark on the downside in each case.
  • No change now in QE2 is therefore warranted.  The purchase of $600 billion, which happens to be about halfway completed, will continue with a planned completion in June.  Officials will continue to assess its usefulness regularly.  No decision on quantitative monetary policy in 2H11 has been signaled.
  • Interest rate policy also was left unchanged.  The target remains 0 to 0.25%, and assuming low resource utilization, subdued inflation, and stable expected inflation continue, officials believe rates will stay “exceptionally low” for “an extended period.”
  • The wording in the bottom three paragraphs including the revelation of a unanimous vote was not modified.

Fed officials have tried to please multiple audiences.  To its critics including many opponents in Congress, tougher wording on the risk of inflation has been inserted but without taking any action now.  By leaving Japan out of the equation, the statement includes no information that might be construed indirectly as creating an excuse for extending Treasury purchases or implementing a looser future policy trajectory through any other means.  For markets that might pounce on any hint of tightening within three to six months, however, the pressure on prices is projected to be temporary, and all avenues of policy were left exactly as they were.  A very important element of this show of continuity was to leave the conditional rate guidance statement exactly as it’s been. 

The next scheduled FOMC statement will be released on April 27.  If Japan’s emergency spins badly for the worse before then, infecting global confidence and financial market functionality, FOMC officials always have the power to act sooner. 

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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One Response to “Mixed Messages from the Fed”

  1. Lorrie says:

    It’s posts like this that make surfnig so much pleasure

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