« The Unbridgeable Moral Divide | Main | The "Anti-Willie Sutton" »

Wednesday, January 26, 2011

The FOMC Keeps the Federal Funds Rate and QEII Unchanged

A quick reaction to the FOMC's decision to maintain current policy objectives. There wasn't much to say -- the Fed did just as expected -- but I said it anyway:

The FOMC Keeps the Federal Funds Rate and QEII Unchanged

Update: From Tim Duy:

Quick FOMC Response, by Tim Duy: The FOMC statement was largely as expected – sticking to the current policy path. That means maintaining the current asset purchase program while holding interest rates low for an extended period. Some specifics:

No Dissents: Kansas City Fed President Thomas Hoenig is no longer a voting member, and none of the new voting members took up his dissent. Completely unsurprising. While some policymakers such as Philadelphia Fed President Charles Plosser believe that QE2 was a mistake, they see the costs –market disruption and loss of credibility – of undoing that mistake as greater than the benefits.

Additional Flexibility: Note the change in the first sentence. From:

Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.
To:
Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.

A focus on a specific data point – unemployment – was replaced with the more general “labor market conditions.” This could signal a willingness to roll back the balance sheet expansion if nonfarm payrolls were growing rapidly but, as workers return to the labor force, unemployment rates remain persistently high. I have difficulty seeing the Fed raise rates as long as unemployment is high, but a return to allowing the balance sheet to contract naturally or directly would not be out of the question.

Commodity Prices: As expected, the FOMC is not poised to follow the path of ECB Head Jean-Claude Trichet and fret about headline inflation. In contrast, the FOMC will focus on the pass-through to core inflation, if any, and the path of longer term inflation expectations.

Bottom Line: No real surprises in this FOMC statement, with the exception of a slight change in language on labor markets that suggests an effort to create additional flexibility.

    Posted by on Wednesday, January 26, 2011 at 11:53 AM in Economics, Monetary Policy, MoneyWatch | Permalink  Comments (4)


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.