Fed Says Economy "Strengthened Somewhat" in Q3; Makes No Changes to Policy

Updated: 5:07 pm. The Federal Reserve Open Market Committee announced no change to their monetary policy on Monday and offered no hints that any additional easing measures are on the horizon.

One of the keys to the statement was the Fed’s assessment of the recent economic activity. The statement says, “Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.”

The Fed also pointed out that Household Spending increased “at a somewhat faster pace in recent months,” and that “business investment in equipment and software has continued to expand.”

However, the committee noted that employment remains a weak spot, saying, “Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.”

Looking ahead, the statement said it continues to expect a “moderate pace of economic growth over coming quarters” but that it does not anticipate unemployment to fall to any meaningful degree. The FOMC wrote, “The Committee… anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate (full employment and stable prices)."

However, it is obvious that the FOMC is concerned about the happenings in Europe. The Fed says, “There are significant downside risks to the economic outlook, including strains in global financial markets.”

On the subject of inflation, the Fed says they anticipate that inflation will settle, at or below levels that are consistent with their dual mandate. The Fed believes that the effects of past energy and other commodity price increases will dissipate further. As such, the Fed remains of the view that inflation is not the primary concern at this time.

Given the current backdrop, the Fed deems it necessary to continue with “operation twist” that began in September. The FOMC wrote, “To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September.”

As has been the case lately, the Fed says it will continue to assess the economic outlook as we go forward and “is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.”

Perhaps the most interesting aspect of the statement is the fact that there was one dissenting vote. Charles Evans supported “additional policy accommodation at this time.” This is the first “dovish” dissent in recent history.

At the press conference following the FOMC announcement, Chairman Bernanke reiterated that the Fed was prepared to do what it takes to get the economy moving. "We're prepared to do more, and we have the tools to do more," Mr. Bernanke told the gathering.

Bernanke also kept hope alive that the Fed would try to do something to help housing. The Fed chief said the purchase of additional mortgage-backed securities to provide support for the weak housing market was a "viable option."

The chairman also reminded the room that there continue to be "significant downside risks to the economic outlook."

"Most notably, concerns about European fiscal and banking issues have contributed to strains in global financial markets" and will "likely to have adverse effects on confidence and growth," Mr. Bernanke added.

Finally, Bernanke said the pace of progress in the economy is "likely to be frustratingly slow," as he referenced the Fed's new economic growth forecasts.