The Federal Reserve made no changes to monetary policy today and only minimal changes to the language of its statement. Despite this morning's report that real GDP shrank at a 0.1% annual rate in the fourth quarter of 2012, the Fed's comments were slightly more optimistic about the economy than they were after the last meeting in December.
The Fed acknowledged the weakness in Q4 by saying economic activity "paused," but attributed the pause to "weather-related disruptions and other transitory factors." At the same time, the Fed recognized an advance in business investment and an easing in strains in global financial markets. Notably, the Fed now says it "expects" growth will "proceed at a moderate pace and the unemployment rate will gradually decline." In December, the Fed said it was "concerned" that "growth might not be strong enough to generate sustained improvement in labor market conditions."
As everyone expected, the Fed maintained its open-ended commitment to buy additional mortgage-backed securities at a pace of $40 billion per month and more long-term Treasury securities at a pace of $45 billion per month.
Now that Richmond Fed Bank President Jeffrey Lacker has rotated off the voting membership of the FOMC, the dissenting role was taken by Kansas City Fed Bank President Esther George, who was concerned that continued loose monetary policy could create future economic and financial imbalances as well as higher long-term inflation expectations.
Like we said after the last few meetings, QE3 will simply keep adding to the already enormous excess reserves in the bank system, not deal with the underlying causes of economic weakness, including the growth in government spending (relative to several years ago), excessive regulation, and expectations of higher future tax rates. QE3 will not add anything to economic growth and, as long as banks are reluctant to lend aggressively, not cause hyper-inflation either.
Click here for a PDF version
|