A Less Dovish FOMC Statement

January 27, 2010

The FOMC statement was less dovish than earlier ones in several respects.

  1. Less confidence was expressed that inflation would remain subdued.  The committee now says substantial resource slack is continuing to restrain cost pressures and that inflation is likely to be subdued for some time; before it had said substantial resource slack is likely to continue to dampen cost pressures and that the FOMC expects inflation will remain subdued for some time.
  2. Hoenig, KC Fed President, dissented from the contingent assertion that conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  This was the first dissent by anyone in favor of a less accommodative statement since August 2008.
  3. Remarks about the economy were more upbeat.  Now the economy has continued to “strengthen,” which replaces “pick up.”  The new statement drops “appears to” from the observation that household spending is expanding moderately, and it declares that business investment is “picking up,” a shift from the prior view that cutbacks in such have slowed.  Inventories are now said to be “better aligned” with sales; previously progress in that direction was being made, according to Fed observations.  The December statement said activity would stay “weak for a time.”  The prediction now is that the pace of recovery is likely to moderate for a time.
  4. In December, the FOMC said financial market conditions had become more supportive of economic growth and not feel that such conditions remain supportive.
  5. The possibility of future quantitative easing was discouraged further.  The November statement had talked about watching the size and composition of the Fed’s balance sheet and making adjustments to credit and liquidity programs when warranted.  December’s statement didn’t mention the possible need for such adjustments, and today’s statement drops mention of the “timing and size” of its security purchases.
  6. Previously announced specifics in the phase-out of unconventional liquidity-promoting measures are going ahead as planned, plus some new details were spelled out.  The Fed is transitioning to an interest rate-oriented policy stance.

The Fed typically uses the January meeting to tune up its message for the Chairman’s Humphrey-Hawkins testimony in February.  There’s no indication that Fed officials are particularly worried about the recent downtick evidenced in investor risk preferences such as lower stock prices, nor about some weaker-than-forecast U.S. economic data.  With the congress threatening encroachment on the Fed’s authority and independence, it’s better to deliver upbeat news rather than warn that the cup is half empty.

I’m less hopeful about the economy in 1H10 than the Fed seems and therefore do not expect the fed funds target to be raised until some time after midyear.  The firmer dollar/weaker euro since the last meeting was not mentioned, but the FOMC almost never comments on exchange market developments.  Dollar appreciation is a form of policy tightening, but the greenback would have to climb a lot further to become a meaningful factor.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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