As the Federal Open Market Committee convenes Tuesday, it continues to face a sluggish economy constrained by slow income growth and weak job creation.
While inflation remains contained, that is both a positive and a negative. Inflation is generally seen as too many dollars chasing too few goods. In the current environment, the dollars created by the expansion of the money supply have largely not been put into use. The excess capacity available due to weak production and capacity utilization should allow the economy, as it recovers, to meet improved demand until inflationary pressures begin. That would give the FOMC time to fine-tune its monetary policy and unwind its quantitative easing path -- expanding money supply without lowering rates -- at a measured, controlled pace.
The FOMC is expected to again stand pat on the target Fed Funds rate, which has essentially been at zero since December. (Technically, the target has been a 0% to 0.25% range.) The statement at the conclusion of the session -- expected at about 2:15 p.m. Eastern time on Wednesday -- will likely be more upbeat than it has been in recent months, but still contain notes of caution, reflecting Chairman Ben Bernanke’s assertion last week that the recession, from a technical perspective, is over
In the statement issued following its meeting in August, the FOMC began what it described as a “smooth transition” from its purchase of Treasury securities -- its quantitative easing policy -- by “gradually slowing the pace” of its transactions, extending the date of the completion of its purchases to the end of October from the vague target of autumn.
At the same time the FOMC then, as expected, did not expand its asset purchase program beyond the $300 billion target. The FOMC also maintained its $1.45 trillion target of investment in mortgage debt.
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) bank lending is down a net $286 billion, about 3.0%, since October (when the FOMC began lowering rates and Congress approved the Troubled Asset Relief Program legislation) and bank cash has increased $560 billion -- 113% -- since then.
Economic Environment (compared with August 11-12 meeting)
Overall Economy
GDP:
GDP: A 1.0% (annualized) decline in the second quarter after a 6.4% decline in the first quarter; The second report of first quarter was unchanged from the advance report. LESS WEAK.Labor Markets
Payroll jobs: Fell 216,000 in August, an improvement from July, but the initial decline of 247,000 jobs in July was revised to a decline of 276,000. Similarly the loss of 443,000 jobs in June was revised to 463,000. LESS WEAK.Unemployment Rate: Rose to 9.7% after falling to 9.4% in July. WEAKER.Initial Unemployment Insurance Claims: 4 week average: 563,000 compared with 565,750 in advance of the August meeting: SLIGHTLY LESS WEAKWages (Average weekly earnings): Up 1.0% year-year compared with a year-year increase of 1.2% prior to the June meeting: WEAKERConsumer Activity
Retail sales: Sales (ex auto) were up 1.1% in August after increasing 0.6% in June. (July data were released on August 13 -- after the August FOMC meeting.) STRONGER (reported nominally and influenced by higher prices).Confidence: Conference Board index 54.1 in August, up from 46.6 (original report) in July; University of Michigan Consumer Sentiment: 70.2 (preliminary September) up from 66.6 (final) July. STRONGERHousing
Home sales: New and existing home sales were each higher in July (the most recent reporting month) than in June (reported in advance of the August FOMC meeting. STRONGERHome values moved still lower (year-year comparison) in June (latest reporting month) according to both the Case Shiller Home Price Index and Federal Housing Finance Agency Home Price Index but at slower pace than in May. LESS WEAKInflation
CPI: Core inflation per the consumer price index declined to 1.4% in August from 1.7% in June (reported before August meeting). IMPROVED PCE: The core inflation rate tracked through the personal income and spending report was 1.4% in July, down from 1.5% in May (the last report before the August FOMC meeting). IMPROVEDManufacturing:
Both the industrial production index and capacity utilization index are up from levels ahead of the August meeting: STRONGER
What 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 voteFOMC Statement
August 12 compared with June 24.
Information received since the Federal Open Market Committee met in April June suggests that the pace of economic contraction activity is slowing leveling out . Conditions in financial markets have generally improved further in recent months weeks . Household spending has shown further continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but appear to be are making progress in bringing inventory stocks into better alignment with sales.
Although economic activity is likely to remain weak for a time, 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. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
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 continues to anticipate 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 is in the process of buying $300 billion of Treasury securities. by autumn. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
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 monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
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.
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.
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