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Redacted Version of the January 2011 FOMC Statement

December 2010January 2011Comments
Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.Shades their view of unemployment to include the phenomenon of discouraged workers.
Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.Shades their view of the consumer upward, but I fear for no good reason.
Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls.Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls.Shades their view on business spending up, but I think they are too early.
The housing sector continues to be depressed.The housing sector continues to be depressed.No change.
Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.Notes the rise in commodity prices, and continues to misread both inflation and inflation expectations.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate.No change.
Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.Translation: we have no idea why our policy is not working, and we don’t know what to do about it.  Monetary policy works with long and variable lags, so we won’t say that our policy isn’t working.  It’s just slow in taking effect.
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.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.No change.
The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.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.No real change.

They will stealth-fund the US Government to the tune of $600 Billion.

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 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.No change to this meaningless sentence. What? You would do otherwise?
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 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.No change.
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.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.No change to this meaningless sentence.

Would you do otherwise?  If we know that the opposite is impossible, why have the sentence at all?

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.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; Kevin M. Warsh; and Janet L. Yellen.Changing of the guard with the regional Fed Presidents.
Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.No dissent.  Interesting because because many pundits speculated over how many would dissent, such as Kocherlakota, Plosser and Fisher.

Comments

  • They shaded their views up on business and consumer spending, and commodity prices, and down on labor unemployment (i.e. unemployment will be harder to eradicate than they used to think.
  • No dissent this time; perhaps the new regional Fed Presidents are giving the Board members a pass at this first meeting of 2011.
  • They highlight that they have a “statutory” mandate, and a “dual” mandate.  They are trying to say that they are required by Congress to do these things, and that it is a tough job.  The flip side is that they admit the Congress has the right to tell them what to do, which Ron Paul may make clear as the Chair of the House’s subcommittee on Monetary Policy.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • Beyond that, if they succeed, how will it be received on Main Street, especially if price inflation is not accompanied by increases in employment, or is accompanied by higher interest rates or lower stock prices?  Stagflation is not popular.
  • That said the economy is not that strong.  In my opinion, policy should be tightened, but only because I think quantitative easing actually depresses an economy.  It does the opposite of stimulate; it helps make the banks lazy, and just lend to the government.
  • The question is this: will the mechanisms of credit transmit inflation to goods and services?  So far, it has not.  Lowering the policy rate does little to incent borrowing when enough people and financial institutions are worried about their solvency.
  • They have no idea why their policy is not working, and they don’t know what to do about it.  Monetary policy works with long and variable lags, so they won’t say that their policy isn’t working.  It’s just slow in taking effect.





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4 Responses to Redacted Version of the January 2011 FOMC Statement

  1. John says:

    It was more dour than I’d expected. The Brits got a unpleasant surprise with Q4 GDP. The statement today implies we’re actually growing, but maybe the US figure will disappoint, too.

    I doubt Kocherlakota will dissent much this year. He was skeptical of quantitative easing, but on the grounds that it’s merely ineffective in stimulating the economy. He seems to see it as neutral, whereas my impression was Fisher and Plosser (+ Hoenig and Lacker) have thought the risks outweigh the benefits. My guess is the “regularly review” language, although strictly meaningless, is a concession to signal the committee will hear them out.

  2. [...] Parsing the latest statement from the FOMC. (Aleph Blog) [...]

  3. DrStan says:

    I love it. Tell me how you really feel. “Meaningless statement.”

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