22Jun FOMC statement vs. 27Apr11
Information received since the Federal Open Market Committee met in AprilMarch indicates that the economic recovery is continuingproceeding at a moderate pace, though somewhat more slowly than and overall conditions in the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However,but longer-term inflation expectations have remained stable. and measures of underlying inflation are still subdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarterselevated, and the unemployment rate to resume its gradual decline towardmeasures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects Increases in the prices of past energy and other commodity price increases dissipate. However, the Committee will continue to commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.
To promote the ongoinga stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keepcontinue expanding its holdings of securities as announced in November. In particular, the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate 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 for an extended period. The Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings.the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as appropriate. needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will actemploy its policy tools as needed to best foster maximum employment and price stability.necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
New Eco Forecasts
’11: GDP from 3.1-3.3 to 2.7-2.9%; Unemployment from 8.4-8.7% to 8.6-8.9%; core PCE from 1.3-1.6% to 1.5-1.8%.
’12: GDP from 3.5-4.2% to 3.3-3.7%; unemployment from 7.6-7.9% to 7.8-8.2%; core PCE from 1.3-1.8% to 1.4-2%.
Press conference takeaways
On balance sheet and how long its size will remain elevated - Bernanke said the Fed has made no comment on this process. "We haven't made any commitment on this" re asset sales.
Why do you only give guidance on one policy tool (i.e. promising to keep rates low for an extended period) but not on others (like asset sales)
What does extended period mean? "we are at least 2-3 meetings away" before that language gets adjusted…and it could be sig. longer · Bernanke says no "precise read" on why growth slowing….we think due to temporary factors but there is the possibility that more longer-lasting impacts are hurting. Bernanke notes that the '13 growth forecasts were left approx. unchanged from Apr.
On Europe - Bernanke says the Fed has been in contact w/officials in Europe (he said there was a G7 call over the weekend). Bernanke said the Europeans are aware of the importance of resolving the Greek situation. Bernanke said this was one of several substantial risks facing the economy.
We have examined US bank exposure to Europe - "the banks we regulate aren't sig. exposed to European sovs directly" although they do have exposure to European banks so are indirectly impacted by events in Europe. "We have asks banks to do stress tests for a Greek default….the effects are very small". On money market MFs, "the situation is similar in that money markets don’t have much direct exposure to Greece/Ireland/Portugal although they do have a lot of Eurozone bank exposure…..if there were to be some impact to Eurozone banks than that would pose some concern for money market MFs".
On bank capital - says the idea of forcing larger banks to hold more capital is appropriate….but he doesn’t discuss what the specific levels should be.
On QE3 - "we will review the outlook going forward and it will be a committee decision…I will make the point though that back in Aug '10, inflation was very low and falling….the securities purchases have been very successful in eliminating this risk…..in addition, growth in payrolls has picked up since the Jackson Hole speech…..as of last Aug, we were missing both sides of our mandate (jobs/inflation)….we are in a different position today…we are closer to our dual mandate objectives than back in Aug…situation now different from last Aug"
What options does the Fed have left? There are plenty of things the Fed can do. We can use language to "ease" further (i.e. promising to hold rates at a specific level for a sepecific 9 period of time"). "we are prepared to take further actions if conditions warrant". "a determined central bank can always combat deflation….persistent deflation is very debilitating". In terms of options left, the Fed could make more securities purchases, cut the interest on excess reserves it pay to banks, give guidance on its balance sheet or set a fixed time for its extended period language.
On deficit - said that sharp spending cuts could harm job creation…."in very short run the fiscal tightening at best neutral and prob. neg. for job creation"
On inflation target - Bernanke notes he has long been fan of inflation target…."this is something worth considering"….but Bernanke says important that people realize the Fed has a dual mandate (both employment and prices)…."the Fed continues to discuss this issue but there is nothing imminent"
On Housing - while overall housing prices are falling, all of this is being confined in the disressed corner of the market…if we can cut down on distressed home sales (~40% of the market now) than it would do a lot for the market.