Overview:
Yesterday evening, the Federal Open Market Committee (FOMC) decided to keep its policy rate unchanged at 2%, as widely expected. Unsurprisingly, one member, Dallas Fed Governor Richard Fisher, voted against the decision, preferring an increase in the fed funds target.
The statement saw only minor changes. If anything, it was slightly more balanced, putting growth and inflation concerns on a more equal footing compared to the previous meeting. The general message remains that the central bank is firmly hold.
The initial market reaction was relatively limited, with 2-year and 10-year Treasuries generally trading side-ways. However, late in the session, the curve steepened slightly as the long end moved upwards. Equities re-sponded positively to the more neutral statement, ending the day on a positive note.
Details:
The growth section in the FOMC statement saw little changes, mentioning the same growth re-straints, ie, softening labour markets, financial markets under considerable stress, tight credit conditions, housing correction and energy prices. Note that energy prices, despite their recent decline, are not (yet) cited as a positive growth factor.
There were few changes in the inflation assessment. The FOMC still sees upsides to inflation. Interestingly, the statement refers to energy prices in the past tense. This might be interpreted as a very cautious ac-knowledgement of the recent retrenchment in commodity prices, which, in turn, would be a dovish twist.
Again this time, the committee did not state an explicit balance of risk. Importantly, the phrase 'diminished downside risks' to growth was replaced by 'downside risks'. Upside risks to inflation were not described as having 'increased' but were instead emphasised as being 'also of significant concern'. Generally, the state-ment put growth and inflation risk on a slightly more equal footing than last time. Also, the fact that there was only one dissenter revealed that disagreement within the committee did not widen, although it probably re-mains unusually widespread.
Assessment & Outlook:
The outcome of the August meeting does not change our previous assessment that the FOMC is set to keep monetary policy on hold well into next year. Firstly, if the current fall-back in com-modity prices proves sustained, inflation will begin to moderate already during late autumn. In combo with mounting slack in the labour market, this should obviously calm inflation fears. Secondly, the economy will face substantial headwinds for the rest of the year, with a continuing housing correction, declining asset prices, tighter credit and a negative growth payback as the tax rebates peter out. Finally, financial markets remain fragile. In our view this spells a monetary policy on hold for a prolonged period.
Current statement:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor mar-kets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over te next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the in-flation outlook remains highly uncertain.
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Com-mittee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Statement from the June 24-25 meeting:
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spend-ing. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit condi-tions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quar-ters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to pro-mote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
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