Author: RBC Financial Group Economics Department

• Federal Reserve will keep target range for fed funds rate in 0.00% to 0.25% range.
• The Federal Reserve referenced the recent spate of disappointing economic reports although maintained a baseline forecast for the economy to post "moderate" growth in the near term and then to pick up its pace. The tenor of the outlook is little changed. The statement pointed to "significant" downside risks to the outlook coming from global financial markets, which are being buffeted by European sovereign-debt concerns. Today's statement indicates that policymakers still feel as if they have tools that can be effectively employed should the economy weaken further, and they pledged to implement "additional accommodation as needed" to ensure growth and employment accelerate. For now, conditions have not deteriorated significantly enough for policymakers to take another genie out of the bottle. Rather, the Fed maintained the policy stance articulated on June 20, 2012 and will keep low rates in place "at least through late 2014" while continuing to extend the term of its asset holdings.

 

The Fed, as expected, maintained the fed funds target rate in the 0.00% to 0.25% range. There were no changes made to policy with the extended Operation Twist program maintained and the policy of reinvesting the proceeds of maturing debt intact. The main differences in the statement were the acknowledgement that the pace of economic growth "decelerated somewhat over the first half of the year" and a heightened tone to the degree of risk to the outlook being generated by global events.

The details of the outlook were little changed from June with household spending characterized as "rising at a somewhat slower pace" while business investment "continued to advance".

The Federal Reserve referenced the spate of disappointing first-half 2012 economic reports although maintained a baseline forecast for the economy to post "moderate" growth in the near term and then to pick up its pace. The tenor of the outlook is little changed from June when the Fed updated its growth forecasts such that real GDP is expected to increase by 1.9% to 2.4% (fourth quarter-over-fourth quarter) in 2012 and 2.2% to 2.8% in 2013. Notably, the Fed pointed to "significant" downside risks to the outlook coming from global financial markets, which are being buffeted by European sovereign-debt concerns. Furthermore, the Fed stressed the slowing in employment growth and the still high unemployment rate. On balance, today's message was little changed from the late June statement and Chairman Bernanke's Congressional testimony. In his testimony, the external headwinds were described as likely to fade of time consistent with the expected pick up in growth next year. Today's statement indicates that policymakers still feel as if they have the tools that can be effectively employed should the economy weaken further. For now, conditions have not deteriorated significantly enough for policymakers to take another genie out of the bottle. Rather the Fed chose the "steady as she goes" route and left policy unchanged.

The July labour report, due out on Friday, has the potential to fulfill the Fed's condition for additional accommodation being needed if hiring fails to show renewed vigour. Today's Institute for Supply Management (ISM) and ADP reports provided mixed signals with ADP's private-payroll survey showing a solid increase of 163,000 while the employment component of the ISM fell 4.6 points to 52.0, which is the lowest reading since December 2009. The ongoing European debt crisis and concerns about how US authorities will deal with its high debt and deficit are weighing on consumer confidence and are keeping downside risks to the outlook for growth and the labour market alive. Our expectation is that businesses will gradually pick up the pace of hiring although this week's report is expected to show a solid, though unspectacular, 90,000 rise in private nonfarm employment.

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.

 

To subscribe or visit go to:  http://www.riskcenter.com