The Federal Open Market Committee has no where to go but up – and that won’t be happening any time soon for fear it would further slow a tortoise-like economy. Even with low interest rates borrowing has all but stopped and excess cash hasn’t flowed back into the markets. According to the most recent data from the Federal Reserve (weekly statement on assets and liabilities of commercial banks) cash on hand is up about $550 billion – more than was on hand in October (when the FOMC began lowering rates and Congress approved the TARP legislation). The increase itself is more than banks hand on hand in October ($473 billion). Since the last FOMC meeting at the end of May, cash on hand is up $37 billion or about 3.7%.
Loans and leases outstanding are down about $170 billion or 2.3% since October 1 and $36 billion since the last FOMC meeting.
The challenge for the FOMC in its statement Wednesday will be to maintain control while at the same time acknowledging but not over-emphasizing a continuing weak economy. If the FOMC is too pessimistic in its post-meeting statement it could squash any hopes of a near-term recovery, hopes which have been dominating conversation, and send bankers running for cover. If the statement is overly ebullient, it could spark some new rounds of lending, with the maxim that “bad loans are made in good times.” We’re certainly in good times, and the e FOMC has to be careful to not suggest they’re here or near.
So, the FOMC Policy Statement will continue to indicate a weak economy but one that is shrinking much less rapidly than it did earlier in the year. With that, the FOMC will leave the target Fed Funds rate unchanged from the 0.0%-0.25% range set in December and continue its program to buy treasury, agency and mortgage backed securities in an effort to keep rates low and fund flowing.
There will be a lot of interest in the statement for what it says about the FOMC thinking in developing an exit strategy towards inevitably raising rates or constricting the money supply as “green shoots” prompt concerns about inflation.
The economic backdrop the Fed faces does indeed show some improvements since the April meeting, not enough to lead to an immediate change but perhaps enough to start to turn the battleship. While the recession is likely to extend at least until the latter part of this year – and perhaps early next – those improvements won’t stop unemployment from continuing to rise well into 2010. The last two recessions saw the unemployment rise 15 months and 19 months, respectively, after the recession ended. A continuing increase in the unemployment rate will make money supply tightening even more difficult.
For all the worries about inflation, the latest inflation figures showed little cause for concern. The increase in the Consumer Price Index in May was tame both on an overall basis and core basis. The exception was gasoline which served to tamp demand for other goods, continuing to keep those prices low.
Economic Environment (compared with April 28-29 meeting)
Overall Economy
GDP:
GDP: A 5.7% (annualized) decline in the first quarter after a 6.1% decline in the fourth quarter WEAK
Labor Markets
Payroll jobs: Fell 345,000 in May and 504,000 in April, decidedly improved from prior months. The 345,000 jobs lost in May were more than jobs lost in any single month in the last three recessions. LESS WEAKUnemployment Rate: Rose to 9.4% in May from 8.9% in April. WEAKERInitial Unemployment Insurance Claims: 4 week average: 616,000 compared with 547,000 in advance of April meeting: LESS WEAKWages (Average weekly earnings): Up 1.2% year-year compared with a year-year increase of 1.4% prior to the April meeting: WEAKER
Consumer Activity
Housing
Home sales: New home sales increased in April up just 1,000 from 352,000 in March to 353,000, but when the FOMC met in May, the most recent sales figures were 356,000. UNCHANGEDExisting home sales were 4,680 in April from 4,550,000 in March, boosted by foreclosure sales. STRONGER.Home values moved still lower in March according to both the Federal Home Finance Agency and Case Shiller: WEAKER
Inflation
Manufacturing:
Both the industrial production index and capacity utilization index are down from levels ahead of the April meeting: WEAKERWhat to look for
The FOMC statement typically contains five key paragraphs:A summary of the FOMC decisionA growth assessmentAn inflation outlookA monetary policy / risks outlookA recap of the vote Here’s how the FOMC statement after the April meeting compared with the statement issued following the March 17-18 meeting at which the Committee announced plans to buy more than $1 trillion in Treasury and other debt instruments and also held the target Fed Funds rate at the 0.0%-0.25% range, followed by a [commentary].
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
[The FOMC acknowledged continued contraction in the economy and that weak sales credit constraints have led businesses to cut back on inventories.]
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
[FOMC offered no change in its assessment of inflation: no immediate or long-term threat.]
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments
[FOMC put a more precise date “by autumn” on its plans to buy longer-term Treasury securities and added its plans to “evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets” but eliminated the reference to expanding the collateral for direct loans.]
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
[The vote was again unanimous.]
Lag Factor: The FOMC Statement is issued at the conclusion of the meeting.
Source:Federal Reserve Board
Release Time: 2:15 PM Eastern
Revision Factor: None.
Market Impact: Substantial. Nothing is more important to financial markets than the Fed's decision on monetary policy.
Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.
