Loading...

The Federal Reserve has just concluded its two-day Federal Open Market Committee meeting, and there were no surprises. Specifically, the FOMC voted 11 to 1 to keep the federal funds rate target at its present range of 0.00% to 0.25%. The lead bank, meantime, opined that current economic activity is being constrained by the weather and other factors.

The bank also intoned that it would keep interest rates very low as long as inflation, which it acknowledged was somewhat below 2%, was to hold under 2.5%, and as long as unemployment, now at an elevated 7.8%, was to stay above 6.5%.

Our sense is that both factors will be in existence for another two years, or so, which is just about what the Fed has been pointing to in recent months.

As to the economy, information received since the FOMC's last meeting in mid-December suggests that economic activity has paused in recent months, which was, unfortunately, affirmed this morning when the Commerce Department released data showing that fourth-quarter GDP contracted by 0.1%. That was a much worse showing than the gain of 1.0% that had emerged as the consensus forecast in recent weeks. However, some of the factors depressing activity late in 2012 were somewhat unusual, including a sharp drop in defense spending, a marked slowdown in inventory investment, and a rare decline in exports--none of which may recur to any degree in the coming months.

Moreover, several key economic categories showed gains in the quarter, including consumer spending, business investment, and housing. After that otherwise dour report's release, the Fed's continuation of its current monetary approach was pretty much a foregone conclusion. The Fed's report also noted improvement in household spending, business fixed investment, and housing. It also noted that employment was continuing to expand at a moderate pace, but that unemployment remained elevated, which is evident from the aforementioned 7.8% U.S. jobless rate.

Meanwhile, in addition to keeping rates historically low for a long stretch to come, the Fed also indicated that the Committee will continue to purchase additional agency mortgage-backed securities at a pace of $40 billion per month. As noted, the policy actions were affirmed by the FOMC with just one vote against such actions, that being by Esther L. George, who was concerned about economic and financial imbalances from the continued high level of monetary accommodation. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.