FOMC Not Expected to Take New Policy Initiatives at This Time

March 13, 2012

The Federal Open Market Committee will reveal its latest decisions today at 14:15.  Note that because the U.S. but not Europe is now on Daylight Savings Time, the time difference between those regions is one hour shorter than usual, that is a sum of four hours with London and five with Brussels and Frankfurt. 

No policy initiatives are anticipated.  At the prior meeting, the forecast timing for a likely rise of the 0-0.25% federal funds rate target range was moved to late 2014 or later from a prior guidance of mid-2013 or later.  Also at that time, new macroeconomic forecasts were unveiled.  These showed unemployment centered at 8.2% this year, 7.4% in 2013 and 7.0% in 2014 versus a long-run tendency of 5.5%.  The projected price deflator range for core personal consumption was 1.65% this year followed by 1.7% in both 2013 and 2014.  Throughout the forecast policy horizon inflation lies below the 2.0% target, just as unemployment lies above its desired long-run level throughout.  The Fed has a dual mandate to preserve price stability and maximize employment, and both criteria therefore justify keeping the current “highly accommodative stance.”

There has been scant net movement in the EUR/USD relationship since the last FOMC statement on January 25, but the dollar has strengthened 6.2% against the yen.  Oil prices are 7.5% higher, and 10-year Treasury yields have firmed 11 basis points and are again above 2.0%.  The DOW is up 3.0%.  In the January 25 press conference and subsequent speaking opportunities including Humphrey Hawkins testimony, Chairman Bernanke has balanced a sense of comfort with the present policy against a lack of any hint that a third round of quantitative easing lies just ahead.  The dollar remains open for QE3, but implementation before the present Operation Twist ends at midyear appears doubtful. 

U.S. economic data have been mixed.  The double-dip recession that was feared last autumn was averted.  Labor statistics continue to surprise on the bright side.  An average 245K per month rise in non-farm payroll employment in December-February was the strongest three-month advance since March-May 2010.  U.S. purchasing manager indices of 57.3 on services in February and 52.4 in manufacturing were both comfortably above the 50 level that separates expansion from contraction.  Today’s news was reassuring of a 1.1% increase in February retail sales and a 1.5% advance in December-February versus September-November.  On the other hand, real personal consumption expenditures was unchanged in November, December and January, and industrial production was flat in January and just 3.4% higher than a year earlier.  January’s goods and services trade deficit was the biggest shortfall since October 2008.  The lead editorial in Monday’s edition of the Financial Times proclaimed, “America is recovering, while Europe is either flat or shrinking.”  That relative advantage brings little solace to the FOMC, which must instead ask if America’s recovery is progressing fast enough and whether anything more on in the way of monetary policy stimulus could safely generate an even better result.

The Federal Reserve is operating in a highly politicized atmosphere.  Criticism of Fed policy under Chairman Ben Bernanke has been widespread on the Republican campaign trail.  Toward mid-2012, the timing of November’s election cannot help but be a consideration as officials contemplate their course after Operation Twist expires. Today’s decision to stick to the status quo will be easier for officials to reach than the decisions at later scheduled meetings this year.  Finally, it is likely that Jeffrey Lacker will dissent as he did in January.  Back then, he “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.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4059 81.35 2.53 11174 84.59
12/14/10 1.3423 83.37 3.38 11497 88.47
01/26/11 1.3658 82.55 3.41 12001 87.36
03/15/11 1.3969 81.04 3.29 11815 98.09
04/27/11 1.4665 82.63 3.36 12612 112.48
06/22/11 1.4392 80.12 2.97 12175 94.87
08/09/11 1.4234 77.09 2.36 10993 81.76
09/21/11 1.3778 76.34 1.93 11377 86.74
11/02/11 1.3724 78.11 2.03 11805 92.77
12/13/11 1.3067 77.92 1.98 12130 100.20
01/25/12 1.3027 77.96 1.97 12670 98.85
03/13/12 1.3087 82.76 2.08 13044 106.31

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

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