Author: RBC Financial Group Economics Department

• The FOMC left policy unchanged at its October meeting, with the target range for the fed funds rate kept at 0.00% to 0.25%.
• The FOMC reiterated its commitment to open-ended purchases of agency MBS as announced in September, while also continuing both its average maturity extension program (aka Operation Twist) and the reinvestment of principal repayments of existing asset holdings, and maintaining its forward guidance that “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
• With the monetary stimulus spigot open wide, the Fed is likely to remain on the sidelines over the near-term and watch how the economic backdrop evolves.

 

After introducing the slate of additional policy measures in September, little in the way of change was expected from the Federal Reserve’s Federal Open Market Committee (FOMC) at its October meeting and in the event, it did not provide any surprises. The FOMC’s assessment of economic conditions that accompanied the unchanged policy decision was largely a repeat of the previous month’s, with overall activity characterized as continuing to “expand at a moderate pace”, while employment growth has been slow and the unemployment rate remains elevated. Consumer spending “advanced a bit more quickly” and the housing sector showed further signs of improvement, but growth in business investment has slowed. With respect to inflation, the FOMC acknowledged the recent increase in annual CPI growth, noting that “inflation has picked up somewhat, reflecting higher energy prices” but reiterated that expectations remained stable and that the Committee anticipates that inflation would likely run “at or below its 2% objective” over the medium term.

In terms of policy, the FOMC reiterated its commitment to open-ended purchases of agency mortgage-backed securities (MBS) at a rate of $40 billion per month as announced in September, as well as the continuation of both the average maturity extension of its holdings and the reinvestment of principal repayments of existing assets into agency MBS, and maintained its forward guidance that “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” Lacker again was the lone dissenter, opposing the additional asset purchases as well as the maintenance of the forward guidance.

With the monetary stimulus spigot open wide, the Fed is likely to remain on the sidelines during the near term and watch how the economic backdrop evolves. The recent improvement in labour market conditions as well as pickup in consumer spending and housing market activity bode well for the overall economy maintaining its modest growth momentum through the end of this year and into 2013. We anticipate that the actions taken by the Fed to this point will provide sufficient policy accommodation to support a modest strengthening of growth over the forecast horizon despite the expected fiscal contraction, and generate further improvements in labour market conditions.

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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