FOMC Preview

January 27, 2010

More anxiety exists now about the sustainability of the global and U.S. economic recoveries than when the FOMC met previously on December 16, so this is not the time to tinker with the basic thrust of monetary policy, which was summarized in the first sentence of the third paragraph of the last statement:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Somewhat more doubt surrounds what will be said about the planned phase-down of quantitative easing, a wide spectrum of unconventional measures to supplement liquidity, promote market functionality, and reduce the cost of market funds in hard-hit areas of the recession like housing  and commercial paper.  At the December and prior meetings, Federal Open Market Committee members had increasingly compartmentalized interest rate policy, which continues to be guided by expected trends in growth and inflation, from all the other activities, which were a response to dysfunctional financial markets, where conditions more recently had shifted in a growth-supporting direction.  At the December meeting, plans to end most special liquidity facilities on February 1, 2010 were reaffirmed, as was the timetable to complete by end-March the purchase of $1.25 trillion of mortgage-backed securities and $175 of agency debt and not to extend those programs beyond the first quarter. While the housing market sputtered in December when existing home sales plunged 16.7% and new home sales dropped 7.6% to their lowest level since last March, I do not expect the FOMC to modify its planned de-emphasis of quantitative easing.  Markets are functioning better, and U.S. data have been mixed; for example, consumer confidence jumped 2.3 points to 55.9 in January from a revised December reading that was 0.7 points higher than reported initially.

The present values of dollar/yen, oil prices, ten-year Treasury yields are currently near to levels at the time of the previous FOMC meeting.  See table below of vital market indicators at prior FOMC meeting dates.  However, the dollar is 3.6% stronger against the euro now than then, and the Dow Jones Industrial Average has lost 5.4% since cresting on January 19 and 3.2% since the December FOMC meeting.  Each of these shifts reflects an erosion of investor appetite for risk.  FOMC members could be overcome by a sense of here-we-go-again and consider whether it might be imprudent to turn off the quantitative liquidity spigots.  However, no time is going to look perfect for doing that, and a decision to over-rule previous plans on the liquidity facilities could be interpreted as a panic move and therefore backfire.  With Bernanke not yet reconfirmed, the least provocative decision would be to continue along the pre-announced path.

Meanwhile, the posture on the Fed funds rate should keep such at its present level at least through mid-2010.

 

  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 1.4043 89.34 3.59 10147 74.49

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

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