Preparing For the FOMC Meeting
The Federal Open Market Committee meets Wednesday April 28, a one day event. During the credit crisis, which now feels like it didn't even occur; the FOMC added an additional day. The next meeting will be on June 23. Currently, the FOMC maintains a 0- 0.25 Fed Funds Rate with an assessment of "Risk to Growth."
The meeting's scheduling is critical for several reasons. First of all, only one positive Jobs Report has been released prior to this week's meeting. That alone is not enough evidence to warrant a change in policy or an adjustment to the critical statement "exceptionally low levels of the federal funds rate for an extended period of time." Logically, the June meeting would be the critical meeting for an adjustment with the addition of two more Jobs Reports. Three consecutive positive Jobs Reports should be enough for the Fed to change the language on one of the more talked about financial sentences in recent memory.
CHANGE IN NON-FARM PAYROLLS
In addition, the Street continues to make a mistake by focusing on the potential move in the Fed Funds rate. More importantly, the unwind of the Fed's balance sheet, the potential sale of assets supported during the crisis, should be the focus. Currently the U.S. has adopted an extremely easy fiscal and easy monetary policy. The risk to growth comes from the easy fiscal policy; my concerns are with the fiscal policy, not the monetary policy.
I would expect this week's post-meeting statement to acknowledge a more upbeat view on the recovery and growth. In fact, look for improved language regarding consumer spending and the housing market. Certainly the statement will address the inflation outlook which continues to align with the Fed's accurate assessment of "subdued inflation." All three are capital markets friendly.
Finally, the talk might be about reducing the size of the Fed's balance sheet via asset sales. However, the rubber hits the road at the June meeting, not this one. Keep in mind that the extremely easy monetary policy is in place for several reasons. However, the most important, and least talked about, is to restore house values. Wealth creation has occurred in the capital markets, but the Fed fight will not end until wealth creation occurs on Main Street with rising property values.
March 16th FOMC Meeting Text
Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.