The FOMC Statement: No Surprises or Market Reaction

October 24, 2012

The October 24th statement from U.S. monetary officials made only a few generally inconsequential changes to the previous September 13 statement.  The final meeting of 2012 on December 11-12 promises to be more newsworthy.  By then, a lame-duck congress will be dealing with the fiscal cliff, and the identity will be known of the next president as well as the legislative branch with which he must work.  A decision will be needed on Operation Twist, which otherwise is set to be phased out at yearend, and a press conference with new forecasts to discuss is scheduled.

This time, the FOMC has maintained its overall view that the economy has continued to expand at a moderate pace, upgrading the assessment of consumption but downgrading that for investment.  Inflation, which previously had been called “subdued,” has “recently picked up somewhat” because of higher energy prices that are already heading lower again.  In any case, expected inflation in the longer term “remains stable.”  September’s statement had asserted that “further” policy accommodation was needed to lift growth and support the labor market conditions.  That stimulus is now underway, so the adjective “further” that modifies policy accommodation has been replaced by “sufficient” in today’s statement.  The rest of the statement reads the same as the prior one, including a mid-2015 date for the earliest likely time of an initial fed funds rate hike.  Richmond Fed President Lacker again dissented from the decision, objecting as before to QE3 and the described time period over which an exceptionally low fed funds rate is likely to be warranted.  Lacker, who has dissented at all seven FOMC meetings this year, was more emphatic this time, explicitly asserting that the current “highly accommodative stance” would not be “appropriate” for the whole length of period indicated by the majority. 

Although the Lacker vote has been the sole dissent, he is not alone in that view.  Each year on a rotating basis, only five of the dozen Fed district presidents including New York on a permanent basis have a right to cast a vote.  Based on recent comments, Charles Plosser and Richard Fisher of the Philly and Dallas Districts seem opposed, too.  If Mitt Romney becomes president of the United States, the opposition will gain more members and notably from a new chairman that the Republican candidate has promised to pick.  Bernanke’s term doesn’t expire until January 2014.  Even if he can get his way during 2013, the effectiveness of the accommodation on the economy is likely to be diluted by the knowledge that policy will be changing substantially in 2014.

Forty minutes after today’s FOMC minutes had been released, the 10-year Treasury yield of 1.77% was unchanged, and net movements in the dollar, U.S. stock exchange indices, oil, and gold had been minuscule.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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