The Federal Reserve Board’s Federal Open Market Committee (FOMC) made no significant policy decisions at its regular meeting, as expected. This means, of course, that its recent decisions will continue. This includes keeping “exceptionally low” interest rates through mid-2013, rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities.
Many of those decisions were controversial within the FOMC itself, with three members dissenting on fears that these actions would stoke inflation. Those three regional Federal Reserve Bank presidents – Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia) – voted with the majority this time. Instead, today’s decision received a dissenting vote from an inflation “dove” instead of a “hawk.”
Charles Evans, the president of the Chicago Federal Reserve Bank, voted against today’s statement because he “supported additional policy accommodation at this time.” Indeed, he has made statements in the past supportive of another round of quantitative easing.
As to larger economic situation, the FOMC was more optimistic than in past statements. While much of the release was verbatim from previous statements, the first paragraph noted some strengthening in a number of areas.
Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
In short, the Federal Reserve will continue to monitor changes in economic activity, inflation, and global market threats moving forward. And yet, at least for the time being, it sees no reason to alter from its previously-stated course.
Update: Despite this optimism, the Federal Reserve lowered its economic outlook for 2011 and coming years from its earlier forecast in June. Real GDP is expected to grow between 1.6 and 1.7 percent this year, well below the 2.7 to 2.9 percent increase expected earlier. In 2012, the economy is now expected to grow by less than 3 percent. In terms of the unemployment rate, the Fed now expects for unemployment to fall to between 8.5 and 8.7 percent next year, with the rate slowly declining to 6.8 to 7.7 percent by 2014.
Chad Moutray is chief economist, National Association of Manufacturers.