FOMC Instant Insight: Are the Doves Still in Control?

The lack of any major changes to the April FOMC statement indicates that the doves remain in control for the time being. We will have to wait for Bernanke’s press conference for confirmation. The Federal Reserve acknowledged that inflation has picked up in recent months, but they still believe that the rise in prices will be temporary. This conviction has hurt the dollar because it suggests that the central bank believes the risks posed by higher commodity prices overshadow the impact that it will have on inflation expectations. The central bank’s assessment of the economy remained virtually unchanged with the only adjustment being that they now believe the economic recovery is proceeding at a moderate pace.  Anyone hoping for the Federal Reserve to end their asset purchases early was sorely disappointed because the central bank plans to complete their $600 billion purchases of Treasury Securities on schedule at the end of June. However they left the door open for adjustments by saying that they will regularly “review the size and composition of their securities holdings” and “adjust these holdings as needed.” Investors will be looking to Bernanke’s press conference at 2:15pm for more clarity on what this exactly means but the lack of major changes to the FOMC statement basically implies that they still haven’t made up their minds. We are not too optimistic about gaining any new insight from Bernanke’s press conference – he doesn’t handle the media as well as ECB President Trichet and will most likely straddle the fence and keep the market guessing. With 2 months to go before the June meeting, the Fed prefers to wait and see how the economy performs before deciding if they should continue reinvesting principal payments in the third quarter.  Nonetheless, the central bank is scheduled to release their latest economic forecasts and upgraded projections for growth and inflation could help the door. 

 Comparing the FOMC Statement

FOMC Statement March 15, 2011

I nformation received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

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 for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Similar Posts:

• Fed Mulls End to Easy Money
• Bernanke: Job Market ‘Far From Normal’
• GBP/USD: Trading the U.K. Consumer Price Report
• Forex Markets Look to Interest Rates for Guidance
• Cable Crashes on High PSNB, Dovish MPC Minutes