FOMC Decision

December 13, 2011

Today’s FOMC statement was as expected and little different in substance from the previous one six weeks ago. 

  • No changes were made to Operation Twist, a program to extend the average maturity of the Fed’s security holdings that was unveiled two meetings ago in September and is to run through next June.
  • Further enhanced communication devices were not introduced yet nor mentioned in the formal statement, but that’s an area that officials continue to brain storm.
  • A stimulative policy is justified because of the Fed’s two mandates, unemployment is falling too slowly toward acceptable levels, and inflation is projected to drop to or below its comfort zone.
  • The conditional prediction of a an exceptionally low zero to 0.25% federal funds rate through mid-2013 or later was reiterated.  The conditions are low resource usage and a “subdued outlook for inflation over the medium term. 
  • The vote was 9-1, with Chicago Fed President Charles Evans recommending additional monetary stimulus as he did at the meeting in November.
  • The economic assessment was very similar to that made in early November.  The economy is expanding “moderately,” but global growth is apparently slowing.  “Some improvement” has occurred in the labor market even as the jobless rate “remains elevated.”  On the other hand, “business fixed investment appears to be increasing less rapidly.”  That’s a shift from November’s characterization of spending on machinery and equipment to be “expanding,” while that on residential structures “is weak.” 
  • Inflation has moderated, and price expectations are stable.

The next FOMC meeting is six weeks from now.  There is a history of the Fed making changes at its first calendar year meeting in late January.  One interest rate tightening cycle in which the fed funds rate doubled from 3% to 6%, for example, was bounded by the first FOMC meetings in 1994 and 1995.  The late January meeting serves as preparation for the chairman’s Humphrey-Hawkins testimony in Congress given in February.  The next statement on January 25 will be followed by a one-hour Bernanke press conference.  Shifts in policy, either of substance or in the nature by which policy is communicated, can be better explained in a press conference venue than a short statement.

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



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