As they promised in their previous monetary policy statement, Fed officials finally unveiled their interest rate forecasts. You see, the Fed’s plan to revamp their communication strategy has been keeping market participants on the edge of their seats lately, and their recent announcement certainly turned out to be a blockbuster in the charts. Here are 4 things you should remember from the latest FOMC statement.
1. Low U.S. interest rates for at least two more years
Several traders were expecting the Fed to merely reiterate their pledge to keep rates on hold until mid-2013, but the central bank surprised the markets by revealing that they plan to stick to their record-low benchmark rate until late 2014. More than a couple more years of low U.S. interest rates? Now that’s definitely an eye-opener!
2. Downbeat economic prospects for 2012 and 2013
It turns out that the Fed is foreseeing lower economic growth during this year and the next, prompting them to downgrade their GDP forecasts from roughly 2.9% to around 2.2% for 2012. They also cut their growth forecasts for 2013 from the previous range of 3.0% -3.5% to only 2.8%-3.2%.
Fed officials highlighted the persistent risks in the jobs market, housing industry, and even the global financial markets as reasons for their not-so-stellar outlook. Then again, they are also hoping that their low interest rate forecasts will actually influence long-term rates to fall. Lower lending rates could encourage borrowing, investment, and spending, eventually spurring growth in the coming months
3. Official inflation target at 2%
Fed officials also took the opportunity to formally set their inflation target at 2%. Apparently, Big Ben wants to reassure markets that the central bank won’t let consumer prices fall or rise too much over the next couple of months.
On the other hand, Bernanke also stressed that 2% isn’t the line in the sand for inflation. He said that the Fed is willing to let prices go a bit higher than target if it would bring down the unemployment rate. Remember, low unemployment usually means more money for consumers, which leads to more demand and eventually, higher consumer prices.
4. Fed is open to more QE
Yep, that’s right! The Fed also announced that if needed, it will buy more bonds…government bonds.
Just like its interest rate and inflation targets, the Fed also signaled that it would be flexible with its stance on extending its Quantitative Easing program if it isn’t satisfied with the employment and inflation numbers in the U.S.
I don’t know about you, but for a central bank that promises clarity and transparency on its actions, I’d say that the Fed’s announcements are still pretty vague.
Still, we already know that the Fed is no oracle from The Matrix. No one can predict what will happen tomorrow, let alone two years ahead, but for now at least we have an idea on the general direction on the Fed’s next monetary policy decisions.