By Steven K. Beckner

WASHINGTON (MNI) – Federal Reserve policymakers split the
difference Tuesday, voting not to resume quantitative easing at this
time, but holding the door open to “additional accommodation” in the
future, depending on “developments.”

In effect, the Fed’s policymaking Federal Open Market Committee
communicated a quantitative easing bias to financial markets, but it is
a highly contingent one.

There had been rampant speculation that the FOMC might authorize
net new purchases of assets forthwith to hold down long-term interest
rates.

The FOMC disappointed hopes for expanding the Fed’s securities
portfolio in the very near term as it merely reaffirmed that it will
“maintain” its Aug. 10 policy of “reinvesting principal payments from
its securities holdings.” That’s shorthand for the FOMC decision last
month to reinvest proceeds of maturing mortgage backed securities to
halt unexpectedly rapid shrinkage of the Fed’s balance sheet due to
mortgage prepayments.

However, the FOMC loosely echoed Fed Chairman Ben Bernanke’s Aug.
27 presentation to the Kansas City Federal Reserve Bank’s Jackson Hole
symposium, by declaring, “The Committee will continue to monitor the
economic outlook and financial developments and is prepared to provide
additional accommodation if needed to support the economic recovery and
to return inflation, over time, to levels consistent with its mandate.”

That goes beyond the FOMC’s softer statement of Aug. 10, which
said, “The Committee will continue to monitor the economic outlook and
financial developments and will employ its policy tools as necessary to
promote economic recovery and price stability.”

In the interim, Bernanke said the FOMC is “prepared to provide
additional monetary accommodation” if the outlook “deteriorates
significantly” in terms of either growth or disinflation. He made clear
that his preferred method, in that event, would be purchases of
long-term securities.

Evidently, FOMC members determined that the outlook has not yet
“deteriorated significantly” enough to warrant further quantitative
easing.

The latest rate announcement echoed the Aug. 10 one in stating that
“the pace of recovery in output and employment has slowed in recent
months.”

In other respects also, the Sept. 21 FOMC statement used very
similar langugage to characterize economic conditions.

“Household spending is increasing gradually, but remains
constrained by high unemployment, modest income growth, lower housing
wealth, and tight credit,” it said.

“Business spending on equipment and software is rising, though less
rapidly than earlier in the year, while investment in nonresidential
structures continues to be weak,” it continued.

“Employers remain reluctant to add to payrolls,” it went on.

“Housing starts are at a depressed level,” it added. “Bank lending
has continued to contract, but at a reduced rate in recent months.”

The statement reiterated that “the Committee anticipates a gradual
return to higher levels of resource utilization in a context of price
stability, although the pace of economic recovery is likely to be modest
in the near term.”

The latest statement uses different language regarding inflation.
Instead of just saying that “inflation is likely to be subdued for some
time,” it said “inflation is likely to remain subdued for some time
before rising to levels the Committee considers consistent with its
mandate.”

That expectation of higher inflation would seem to take some of the
force out of the FOMC’s statement of readiness to “provide additional
accommodation … to return inflation, over time, to levels consistent
with its mandate.”

In August, the core consumer price index was flat and was up just
0.9% on a year-over-year basis — well below the FOMC’s implicit target
range of 1.5% to 2.0%.

Once again, Kansas City Fed President Thomas Hoenig was the lone
dissenter, reiterating the same opposition he expressed on Aug. 10.

Hoenig “judged that the economy continues to recover at a moderate
pace,” said the statement. “Accordingly, he believed that continuing to
express the expectation of exceptionally low levels of the federal funds
rate for an extended period was no longer warranted and will lead to
future imbalances that undermine stable long-run growth.”

“In addition, given economic and financial conditions, Mr. Hoenig
did not believe that continuing to reinvest principal payments from its
securities holdings was required to support the Committee’s policy
objectives,” the statement added.

The FOMC made clear it is prepared to resort to more bond
purchases, but only if economic sluggishness and/or disinflation trends
prove sufficiently worrisome. So far, they are not.

The FOMC will be undergoing its quarterly, three-year forecasting
exercise at its Nov. 2-3 meeting. Depending on the data between now and
then and the outcome of the forecast, quantitative easing could become
either more or less viable at that time.

** Market News International Washington Bureau: 202-371-2121 **

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