The Federal Reserve Leaves Monetary Policy Unchanged

By December 13, 2011Economy

The Federal Reserve Board’s Federal Open Market Committee (FOMC) left monetary policy unchanged, as expected. In fact, the statement is nearly identical to the one released on November 2. The only differences appear in the first paragraph, which describes the current economic environment. The Fed writes:

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Slowing “global growth” is clearly a reference to the sovereign debt crisis in Europe. The Federal Reserve continues to monitor the developments there with great interest, and it was just a couple weeks ago that it – acting in concert with other central banks – acted to provide more liquidity to the global financial system.

The Fed will continue its policy of 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.

As was the case with last month’s statement, the only dissention came from Charles L. Evans, the president of the Chicago Federal Reserve Bank. He voted against the decision to leave monetary policy unchanged based on his belief that the Fed should do another round of quantitative easing. While some Fed-watchers believe that this might be possible in early 2012, a third round of quantitative easing (or “QE3”) was not expected to come from today’s FOMC meeting. It would also come over the objections of three FOMC members who dissented in previous meetings: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia).

Note that the FOMC membership will change in 2012, which could alter the dynamics. The current makeup of presidents from Chicago, Dallas, Minneapolis and Philadelphia will shift to their counterparts from Atlanta, Cleveland, Richmond and San Francisco. The president of the New York Federal Reserve Bank is always a member of the FOMC along with the Federal Reserve Board members themselves.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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