The Federal Reserve made no changes to monetary policy today and made only minimal changes to the language of its statement. The Fed maintained its open-ended commitment to buy additional mortgage-backed securities at a pace of $40 billion per month. It also reiterated that it will "closely monitor" the economy and financial markets to gauge whether it should continue these purchases or even expand them.
Once again, the Fed said this kind of accommodation will continue until it sees substantial improvement in the outlook for the labor market. Notably, the language in the statement addressing the labor market – "growth in employment has been slow, and the unemployment rate remains elevated" – was unchanged despite the big drop in the jobless rate last month to 7.8%.
Slight changes to the statement included a reference to consumer spending growing a "bit more quickly" and that "inflation recently picked up somewhat." Otherwise, this month's statement was almost a carbon copy of last month's statement.
Also, of note, the Fed did not change its guidance on how long it will wait before it expects to raise the federal funds rate, staying at mid-2015. Some analysts had expected a shift to economic targets, like not until either the unemployment rate goes below 7% or the inflation rate hits 3%.
Once again, the lone dissent from the Fed's statement was from Richmond Fed President Jeffrey Lacker, who opposed both QE3 and the description of a time frame before the Fed would raise rates.
Like we said after the last meeting, 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, 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.
For more on the future of the Fed, please see our recent video on the topic of another term as Chairman for Bernanke.
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Posted on Wednesday, October 24, 2012 @ 3:51 PM
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