The US Federal Open Market Committee kept the federal funds target rate unchanged at 0.00% to 0.25%, AND announced an that interest rates would remain ‘exceptionally’ low until at least late-2014. This is an extension from the August 2011 announcement that rates would remain unchanged until at least mid-2013.
In making the decision the FOMC highlighted the following key points:
- The economy has been expanding moderately, notwithstanding some slowing in global growth.
- Indicators point to some further improvement in overall labour market conditions, but the unemployment rate remains elevated.
- Household spending has continued to grow, but growth in business fixed investment has slowed, and the housing sector remains depressed.
- Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.
- The FOMC expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually.
- Strains in global financial markets continue to pose significant downside risks to the economic outlook.
The FOMC also decided to continue its program of extending the average maturity of its holdings of securities as announced in September 2011. The FOMC is also maintaining its existing policies of reinvesting principal payments from its holdings of mortgage-backed securities. No additional QE was announced, but clearly the Fed is prepared to extent their QE programme, if required. The most likely dates for any announcements on additional QE are at the March or April meetings.
The FOMC also released some fascinating charts on their outlook for US GDP growth, unemployment and inflation (see attached). The FOMC also divulged individual policymakers’ projections of the appropriate path for the FOMC’s target federal funds rate. Wow!
Clearly the rate decision today, coupled with the increased transparency in communication, are aimed at keeping the long-dated US government bond yield as low as possible for as long as possible. This is aimed at trying to ensure a revival in the still depressed US housing market. The FOMC announcement resulted in an initial 13 basis point drop in the 5-year US Treasury yield to 0.76% and a slightly smaller 12 basis point decline in the 10-year yield to 1.94%.
Some analysts will view the latest FOMC announcement as another sign of desperation and simply (perhaps far too simply) conclude that the FOMC is digging a bigger hole for itself. Alternatively, one could argue that the approach is extremely innovative and has actually achieved some degree of success. Clearly the risks associated with this extreme approach to monetary policy are going to have to be managed extremely well. However, it should at least be acknowledged that although the QE programme was started more than 3 years ago, and the Federal Fund Target Rate has already been at 0.25% for more than 3 years, US inflation remains well contained, and is projected to decline to less than 2% in 2012.
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