US Federal Reserve Stays the Course

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, April 28, 2011

On the economy's performance, the Fed said the recovery is "proceeding at a moderate pace" in essence acknowledging the improved tone in the data that began late last year. In March, the Fed said the economy had found a firmer footing. The assessment of labour market conditions was unchanged from the March assessment that they are "improving gradually."  Still, the Fed reiterated that the current unemployment rate "remains elevated."

On the details of the economy's performance, the Fed maintained the same language and tone with both consumer spending and business investment in software and equipment continuing "to expand" while real estate markets remain under pressure with residential housing still "depressed" and non-residential investment "still weak."

The rise in both energy and non-energy commodity prices has "pushed up inflation in recent months" although the Fed still expects that this will provide "transitory" upward pressure on the headline inflation rate. The Fed notes that inflation expectations are stable and the underlying rate subdued. Once again, the Fed committed to watching both inflation and inflation expectations closely although it did not signal any rise in concern that price pressures will intensify.

Chairman Bernanke will hold the first post-meeting press conference today at 2:15 pm ET and will provide an update to the Fed's central tendency forecasts. In the past, these forecasts have been released with the minutes to the FOMC meeting, which are published three weeks after the meeting. A review of previous forecasts shows that the Fed upgraded its central tendency growth forecasts in January 2011 to levels that were just shy of those made in April 2010. The January 2011 unemployment rate forecast, however, remained quite a bit higher than in April 2010 although the steady decline in the unemployment rate during the past four months (it fell a cumulative 1 percentage point to 8.8%) may result in that forecast being cut today. The Fed provides four updates to its economic forecasts each year.   

Today's statement was very little changed from the one delivered on March 15, 2011, and there was unanimous consent among FOMC members to today's action, or lack thereof. As long as the economy maintains its present growth path (we look for growth to reaccelerate in the second quarter of 2011 after a mediocre first three months), the stage will be set for policymakers to begin the process of removing the current "extraordinarily" stimulus. The newly minted press conferences will provide the chairman with an ongoing opportunity to discuss how the Fed sees the withdrawal of policy stimulus unfolding. Our assumption is that the end of QE2 will mark the transition in Fed policy. Looking ahead, removing the "extended period" clause from the statement is a likely next step followed by the end of reinvestment of the proceeds of maturing debt as the Fed begins to reduce the size of its balance sheet. After that, the process of draining reserves begins and then the Fed will be in position to raise the Federal Funds rate target, which we anticipate will occur in the second quarter of 2012.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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