As widely anticipated, the Federal Reserve's statement on monetary policy was almost a carbon copy of last month's statement, when it embarked on a new round of "quantitative easing."
The Fed made no direct changes to the stance of monetary policy today, leaving the target range for the federal funds rate at 0% to 0.25%. In addition, the Fed maintained its pledge to keep the funds rate at this level for an "extended period." The Fed also reiterated its commitment – initially made in early November – to purchase $600 billion in long-term Treasury securities by mid-2011. These purchases are on top of reinvesting (into long-term Treasury securities) principal payments on its pre-existing portfolio of mortgage securities.
The Fed only made minor changes to its statement. Last month it said the recovery was "slow." This is now changed to growth being "insufficient to bring down the rate of unemployment." Last month the Fed said consumer spending was growing "gradually." Now the Fed says it's growing at a "moderate" rate. The Fed made no changes to its language on inflation.
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These changes are a disappointment. Sometimes we wonder what economy the Fed is looking at. Real GDP growth in the third quarter appears ready to be revised up to about a 3% growth rate (from an original report in late October of 2%). Fourth quarter real GDP looks like it's growing at about a 5% annual rate. In the past five months, retail sales are up at a 12.1% annual rate, close to the fastest five-month period since the bursting of the NASDAQ bubble in 2000. Claims for jobless benefits – both new and continuing – are trending down rapidly. More importantly, this improvement is happening well before quantitative easing should be having an impact on the economy.
In the end, we believe the new round of quantitative easing will have little to no impact on the larger economy. Banks already had roughly $1 trillion in excess reserves prior to that new policy. Adding to this pile of reserves will not influence the desire of financial institutions to lend, nor will it lead to any near-term increase in the supply of currency in circulation. All it will do is sit idle on the liability side of the Fed's balance sheet and on the asset side for the banks.
Once again, Kansas City Fed President Thomas Hoenig was the only dissent. Unlike the Fed's statement, Hoenig's dissent mentioned the "improving economy" and, once again, noted that continued high levels of monetary accommodation could generate future financial imbalances and eventually destabilize the economy. We believe Hoenig is right.
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Posted on Tuesday, December 14, 2010 @ 3:15 PM
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