The Federal Reserve announced Tuesday that the economy remains depressed and that conditions warrant exceptionally low interest rates “at least through mid-2013.”
This is the first time in modern history that the Fed has provided a dateline to its monetary policy. Given the extreme turmoil in the markets recently, the move leaves many analysts believing that future policy adjustments by the Fed may be limited.
On the other side of the coin, the glass-is-half-full crowd will argue that the Fed showed that there was no reason to panic and may be trying to send that message to the markets.
As we wrote earlier, there were several options available to the Fed. However, QE3 was not considered to be a viable alternative at this stage. The consensus felt the Fed would extend its language (check) or enter into some other modest policy adjustments such as cutting rates on reserves held by banks or by initiating a “twist” operation designed to drive longer-term rates down.
In terms of the economic outlook, the Fed statement opens with “Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.”
The statement goes on to say, “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."
On the topic of employment, the FOMC statement reads: “Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.
As for the second half of the Fed’s mandate, the Fed said, "Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable."
In short, the Fed did not provide or hint that any additional stimulus measures were forthcoming. This appears to be a tight-lipped statement designed to indicate that conditions are not bad enough to warrant the usage of the few weapons the Fed has left.
It is also important to note that there were three dissenting members of the committee: Fisher, Kocherakota, and Plosser. This is a sign that Bernanke is unlikely to be able to push through new measures as he did last year with QE2.
Stocks initially rallied on the news that the “extended period” had been “extended” but have since fallen to the lows of the day with the Dow down 140 points. However, we should remember that volatility is normal after Fed announcements.
S&P 500 - Last 3 Month
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