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  Fed Pays Lip Service to Better Economy and Higher Inflation
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The Federal Reserve made several changes to the language of its statement today, acknowledging an improving economy and higher overall inflation.  However, the Fed also made it clear it does not think any of this warrants a change in the stance of monetary policy. 

The Fed was more bullish on the economy, saying it was on a "firmer footing" and that the labor market was "improving gradually."  Previously the Fed had said economic growth was not enough to generate "significant improvement" in the labor market.  The Fed recognized faster growth in household spending and, importantly, finally omitted long-used language that household spending was being constrained by high unemployment, modest income growth, declining housing wealth and tight credit. 

On inflation, the Fed noted the rapid rise in commodity prices, such as oil, and said it would pay attention to these prices.  However, the Fed also said the higher inflation related to commodity prices was likely to be "transitory" and that underlying inflation is trending downward.  This is even more dovish than the prior language that said underlying inflation is "subdued."  In other words, the Fed will watch commodity prices but is not going to change policy because of them.  In essence, the Fed thinks it's a spectator of, not a participant in, commodity price changes, even though it controls the supply of the currency in which these commodities are denominated.

One subtle change in the statement was that the Fed took out a reference to "slow progress" toward its objectives of maximum employment and price stability. 
Otherwise, as everyone expected, the Fed made no direct changes to the stance of monetary policy today, leaving the target range for the federal funds rate at 0% to 0.25%.  In addition, the Fed maintained its pledge to keep the funds rate at this level for an "extended period."  The Fed also reiterated its commitment – initially made in early November – to purchase $600 billion in long-term Treasury securities by mid-2011.  These purchases are on top of reinvesting (into long-term Treasury securities) principal payments on its pre-existing portfolio of mortgage securities.

The Fed is not going to raise rates in 2011 but continued economic improvement and gradual increases in the "core" inflation measures the Fed watches should put the Fed in the position to start raising rates early next year. 
 
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Posted on Tuesday, March 15, 2011 @ 5:15 PM • Post Link Print this post Printer Friendly

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