U.S. FOMC Makes No Changes to Policy in January


 
Author: RBC Financial Group Economics Department
Location: Toronto
Date: 2013-01-31

  • The Federal Open Market Committee (FOMC) made no changes to monetary policy at it January 2013 meeting.
  • The Fed will continue to purchase agency mortgage-backed securities (MBS) at a pace of $40 billion per month and longer-term Treasuries at a pace of $45 billion per month, while also maintaining its policy of reinvesting principal payments from its current holdings into MBS and rolling over Treasury securities at auction. The fed funds rate target remains in the 0.00% to 0.25% range.
  • This meeting represented a changing of the guard among the voting members of the FOMC. Kansas City Fed President Esther George took up the mantle of dissenter from Jeffrey Lacker, who had previously occupied the role and voted against the FOMC’s decisions at each meeting in 2012.
  • Like the Fed, we expect that the pace of growth in the US economy in the current quarter will improve on the disappointing fourth-quarter 2012 reading reported earlier today despite some fiscal headwinds, and the ample monetary policy stimulus should help support a modest acceleration during the second half of this year and into 2014. With that said, while inflation is expected to remain well behaved, we do not expect that growth will be sufficient to bring the unemployment rate below the Fed’s 6.5% threshold in either this year or next, meaning that the fed funds rate target will likely remain within the current “exceptionally low range” of 0.00% to 0.25% into 2015.

 

Expectations were for this month’s meeting of the Federal Reserve’s FOMC to be a fairly dull affair in comparison with the December 2012 confab that resulted in the Fed replacing its expired Maturity Extension Program (otherwise know as Operation Twist) with the continued purchase of longer-term Treasury securities without any offsetting sales as well as the move toward quantitative targets in its forward guidance for the path of the fed funds rate versus the previous reference to calendar dates. In the event, these expectations were met with the FOMC reiterating its commitment to the policies currently in place without making any further modifications.

The FOMC, however, made slight changes to its assessment of economic conditions in the release accompanying the unchanged policy decision, giving a nod to the weaker than expected fourth-quarter 2012 GDP report released earlier this morning. The Committee noted that the information received since the December meeting suggested that “growth in economic activity paused in recent months” (compared to continuing to expand at a “moderate pace” previously), although this was largely attributed to “weather-related disruptions and other transitory factors.” The FOMC judged that employment has continued to grow at a “moderate pace,” but the unemployment rate remained elevated. Consumption and business investment both advanced, and the housing sector has shown further signs of improvement. Inflation has been running “somewhat below” the Fed’s longer-run objective and will likely be “at or below” the 2% objective for the medium term, although longer-term inflation expectations remain stable.

This meeting represented a changing of the guard among the voting members of the FOMC with regional Fed presidents Bullard, Evans, George, and Rosengren replacing Lacker, Lockhart, Pianalto, and Williams. Of note, Kansas City Fed president Esther George took up the mantle of dissenter from Lacker, who had previously occupied the role and voted against the FOMC’s decisions at each meeting in 2012. Ms. George expressed concern that “the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”

Like the Fed, we expect that the pace of growth in the US economy in the current quarter will improve on the disappointing fourth-quarter 2012 reading reported earlier today despite some fiscal headwinds, and the ample monetary policy stimulus currently in place should help support a modest acceleration during the second half of this year and into 2014. With that said, while inflation is expected to remain well behaved, we do not expect that growth will be sufficient to bring the unemployment rate below the Fed’s 6.5% threshold in either this year or next, meaning that the fed funds rate target will likely remain within the current “exceptionally low range” of 0.00% to 0.25% into 2015.

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