–Retransmitting 16:08 ET Story, Fixing Typo in Story Headline
By Steven K. Beckner
WASHINGTON (MNI) – At their last meeting of 2012, Federal Reserve
policymakers refrained from changing their monetary policy, but that’s
not the same as saying they did nothing.
What they did not do was significant.
The Fed’s policymaking Federal Open Market Committee decided not to
change its communications strategy at this point, even though the FOMC
had a lengthy discussion of doing so at its November meeting and even
though a task force headed by Vice Chairman Janet Yellen has been busily
working toward that end.
Instead, the FOMC was content for now to repeat its expectation
that the federal funds rate will stay near zero “at least through
mid-2013.”
Such a calendar date is widely seen as an unsatisfactory form of
“forward guidance,” and there is widespread support on the committee for
replacing it with a set of economic conditions for changing the funds
rate.
Perhaps the FOMC could not come to agreement on exactly how to
rephrase its forward guidance on the path of the funds rate at this
one-day meeting.
Or perhaps, as MNI suggested in its FOMC preview, there was a
concern that changing the forward guidance now would have been seen as
an effort by the Fed to ease monetary policy and as a harbinger of a
third round of quantitative easing.
Judging from its characterization of economic conditions, the FOMC
was not ready to ease policy further at this time and was not desirous
of signalling an imminent easing beyond repeating that it is “prepared
to employ its tools to promote a stronger economic recovery in a context
of price stability.”
Only one member — Chicago Federal Reserve Bank President Charles
Evans — dissented in favor of “additional policy accommodation at this
time,” as he did on Nov. 2.
It is also noteworthy, though hardly surprising, that the Fed Board
of Governors has not cut the discount rate.
Although the FOMC did not ease further at this meeting, it left in
place a very accommodative policy. The funds rate has now been in the
zero to 25 basis point range for three years, and the FOMC approved the
continuation of programs to push down longer term rates.
It voted to continue the “maturity extension program,” better known
as “Operation Twist,” under which the Fed will buy $400 billion of
Treasury bonds and sell an equal amount of short-term Treasury
securities in an effort to cut already very low long-term interest rates
by the end of next June.
And — to keep the Fed’s bloated balance sheet from shrinking —
the FOMC reauthorized its policies of reinvesting proceeds of maturing
agency and mortgage backed securities into more MBS and of rolling over
maturing Treasury securities at auction.
It would have been difficult for the FOMC to do otherwise,
notwithstanding what it said were “significant downside risks to the
economic outlook” due to “strains in global financial markets.” That’s
an obvious reference to the European debt crisis and attendant interbank
funding problems.
The FOMC, acting in concert with other central banks, had
previously addressed those problems with extended and cheapened dollar
swap lines. And it has said that it is prepared to use other liquidity
tools if necessary. There was nothing more to do now.
Notwithstanding the dark clouds blowing in from Europe, the FOMC
was perforce fairly upbeat about the domestic economy in light of recent
data.
“Information received since the Federal Open Market Committee met
in November suggests that the economy has been expanding moderately,
notwithstanding some apparent slowing in global growth,” the Fed said in
its policy statement.
“While indicators point to some improvement in overall labor market
conditions, the unemployment rate remains elevated,” it continued.
“Household spending has continued to advance, but business fixed
investment appears to be increasing less rapidly and the housing sector
remains depressed.”
The statement said “inflation has moderated since earlier in the
year, and longer-term inflation expectations have remained stable.”
One thing that might lead the Fed to adopt further easing measures
in the future would be signs of excessive disinflation. The FOMC
evidently was not seeing that yet, but it repeated its expectation that
“inflation will settle, over coming quarters, at levels at or below
those consistent with the Committees dual mandate” and added it “will
continue to pay close attention to the evolution of inflation and
inflation expectations.”
The FOMC held out the possibility of changes to the balance sheet,
as it has before, saying it “will regularly review the size and
composition of its securities holdings and is prepared to adjust those
holdings as appropriate.”
Looking ahead, a change in communications strategy is almost
certainly coming, as both “hawks” like Philadelphia Fed President
Charles Plosser and “doves” like Evans favor a “state-contingent” type
of forward guidance that defines the FOMC’s “reaction function.”
The FOMC could even decide to include interest rate forecast in its
quarterly, three-year Summary of Economic Projections.
But reaching a consensus will take time, and officials differ over
whether communications should be used as an “easing tool,” as Fed
Chairman Ben Bernanke has mentioned, or simply as an effort to achieve
greater clarity.
There was widespread speculation after the FOMC cut the swap line
rate by 50 basis points that the Fed Board of Governors would soon be
cutting the discount rate from the current 75 basis points..
But doing so would have meant narrowing the spread between the
funds rate from 50 basis points back to 25 basis points where it was at
the depths of the financial crisis. That would have meant conveying a
level of anxiety about liquidity conditions and/or the economy that the
Fed plainly does not feel at this point.
If the Board had decided to cut the primary credit rate at the
discount window on Monday, it almost certainly would have been
announced by now.
** Market News International Washington Bureau: 202-371-2121 **
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