If you were expecting Big Ben to announce a surprise yesterday, then you must be pretty bummed! The much-awaited FOMC statement wasn’t exactly as exciting as watching the Olympics as the Fed just stood pat.
A lot of market analysts had expected the Federal Reserve Chairman to promise that the central bank would keep it benchmark rates at exceptionally low levels for a long time. There were also those who hoped to hear a new asset purchase plan. But no, the Fed didn’t mention any of that.
Consequently, stocks and other higher-yielding assets slid down the charts. It seems that some market junkies worried that the central bank’s inaction could only fuel the slowdown in jobs, spending, and manufacturing even more.
So what did Big Ben talk about? Here are four takeaways from yesterday’s FOMC statement:
1. Still no QE3!
The Fed is well aware that the economy is far from being strong. However, central bankers didn’t think that the recent signs of weakness warrant any new stimulus measures.
This caught a lot of market gurus off guard as many of them anticipated some form of easing. Instead, the Fed just mentioned its usual rhetoric of keeping interest rates steady until late 2014.
But I guess we should’ve seen that coming. After all, the Fed just announced that it would extend Operation Twist last June. Perhaps they still want to wait for its effects to sink in first before engaging in other stimulus efforts.
2. Economy activity: “Decelerated somewhat” vs. “Expanding moderately”
In its last statement, the Fed sounded more upbeat about the economy saying that it was expanding moderately. However, yesterday’s FOMC statement described economic activity to have somewhat decelerated.
That’s no surprise. Since its last meeting six weeks ago, statistics have revealed that the economy expanded at a paltry rate of 1.5% in the Q2 2012 from a year ago. On top of that, we’ve also seen that only 80,000 jobs were added in June. Central bankers also remarked that household spending has been rising at a slower rate than in 2011.
However, the bank’s inflation outlook remains the same in that the PCE index would still fall short of its 2% target.
3. More dovish tone = More easing in September?
Another notable change in Fed lingo during their recent statement was their promise to “closely monitor” new economic and financial information and to “provide additional accommodation as needed.”
Recall that the FOMC only said that it was “prepared to take action as appropriate” back in June, when the policymakers stopped short of implementing a full-scale easing program and extended its ongoing Operation Twist instead. The FOMC’s use of slightly stronger words this time around suggests that policymakers could be cookin’ something up in case the economic situation gets much worse.
Let’s not forget that, back when former Fed Chairman Alan Greenspan was in charge of U.S. monetary policy, the words “closely monitor” were often used prior to Fed decisions which involved further easing. At that time, the Fed even loosened monetary policy in between meetings in order to keep the U.S. economy afloat during the 90s.
4. Lacker dissents…. again!
For the fifth consecutive time since January this year, Richmond Fed President Jeffrey Lacker disagreed with the rest of the FOMC members regarding the 2014 time horizon for keeping rates low. He also expressed his dissent towards the Fed’s decision to extend their Operation Twist program and even argued that an interest rate hike must be implemented next year.
Given the current state of the U.S. economy though, gunning for tighter monetary policy by 2013 may be quite a stretch. As Bernanke pointed out, the Fed is currently watching two main sources of risk, namely the worsening euro zone debt crisis and the U.S. fiscal cliff. Policymakers are still concerned about the global financial threats posed by a looming debt contagion and it doesn’t help that the U.S. is facing nearly 600 billion USD in spending cuts and tax hikes next year.
Market participants will most likely wait for more clues during Bernanke’s next testimony in the annual Jackson Hole gathering at the end of this month. After all, the Fed’s next policy decision will take place more than a month from now and traders like you and I could use all the hints we can get. I’ll keep you posted if any updates come up so make sure you stay tuned to my blog!