Fed Stays Course With Policy; Says Economy Expanding Moderately

The Federal Reserve stayed the course on Tuesday by leaving their monetary policy and interest rates on hold. The Fed said that the economy in the U.S. has been "expanding moderately" but also left the door open to further stimulative measures going forward.

The primary difference between this statement and the Fed’s November statement related to the outlook for the U.S. economy. The Fed now says that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. In the November, the FOMC had said that economic growth had “strengthened somewhat” in the third quarter.

Market reaction was initially negative as the S&P moved to the lows of the day on the announcement. Traders were apparently disappointed that the FOMC did not make any changes to their communication policies. However, as usual, it was computer-driven program trades that moved the market in a violent fashion after the report.

On the topic of the job market the Fed said that while indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. In November the statement had said, “Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.”

Turning to the issue of inflation, the FOMC still doesn’t see a problem. The committee said that inflation has moderated since earlier in the year, and that longer-term inflation expectations have remained stable.

The FOMC also made mention of the uncertainty being created by the ongoing European sovereign debt crisis. "Strains in global financial markets continue to pose significant downside risks to the economic outlook," the statement said.

Once again the Fed’s decision was not unanimous as there was one dissenting vote. For the second consecutive meeting, Chicago Fed President Charles Evans dissented against the decision, saying he favored additional easing measures be taken now.

In terms of monetary policy, the committee decided to continue its program to extend the average maturity of its holdings of securities (dubbed “operation twist” by the media) as announced in September.

Finally, the FOMC kept the now familiar phrasing relating to interest rates intact. “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

 

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