The departure of Fed member Hoenig from the FOMC tipped the scales back toward unanimity on today's policy decision with all members voting for today's action. Hoenig, who rotated off the FOMC, consistently voted against maintaining an easy stance of policy because he was concerned about the risk that imbalances would develop within financial markets and the economy, which in turn could boost long-term inflation expectations.

Policymakers acknowledged that consumer spending "picked up late last year" and that investment in software and equipment is "rising". The qualifier that the pace of this spending by businesses has slowed relative to earlier last year was dropped. Housing was described as being "depressed" once again, and employers are still "reluctant to add to payrolls" the Fed said.

Unlike the chorus of forecasters, who expect that Friday's fourth-quarter 2010 real GDP report will show a sharp acceleration in the pace of growth, today's statement suggests only a very mild upgrade to the Fed's forecast as it carefully acknowledged that some areas of the economy are in the process of strengthening. The consensus forecast is for fourth-quarter 2010 real GDP growth of 3.5% at an annualized pace, the fastest rate of increase since the first quarter of 2010. This report will confirm the solid improvement in the monthly data reports providing a lift to the economy at the start of 2011. Earlier this week, the Conference Board's report showed that consumers are regaining their confidence about the prospects for the economy and, to a lesser degree, see conditions in the labour market improving.

While recent data are good building blocks for the economy to shift from recovery into expansion, the Fed appears to be very cautious about extrapolating recent data into a view that the economy is accelerating and that policy needs to be altered. Furthermore, the statement highlights that policymakers remain worried about the high level of unemployment and the fact that inflation measures "have been trending downward." Today's statement again mentioned that the progress toward its mandated goals of full employment and price stability has been disappointing. This statement reaffirms that policymakers will only begin to unwind the components of the current highly stimulative monetary policy once conditions in the labour market are deemed to be on firmer ground. The low level of core inflation, which only inched higher in the final months of 2011 to 0.8%, also argues against the Fed making any adjustments toward less accommodation any time soon. 

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.