The Fed Stands Still - December 13, 2011
The Federal Reserve, just moments ago, concluded its latest Federal Open Market Committee (FOMC) meeting, in which, it intoned that the economy, based on recent data, is continuing to expand moderately. That improvement is coming in spite of some worrisome headwinds evolving on the global front. It said that while most indicators point to some improvement on the U.S. labor front, the jobless rate, at 8.6% in November, remains unduly elevated and is a threat to aggregate growth in the months to come.
Meanwhile, the FOMC also observed that household spending was continuing to advance, a sentiment that was underscored by the modest improvement in retail spending seen in November. Such sales data were issued this morning. The FOMC also indicated that the housing sector remained depressed, which is apparent in the metrics that continue to be released. Also, it noted that inflation had moderated from early in the year and that longer-term inflationary expectations had remained stable.
Importantly, the Fed suggested that it continues to expect a moderate pace of economic growth over the coming quarters, which is in line with our thinking, as we see GDP growth in the current three months approximating 2.5%. Given the turmoil and uncertainty in Europe, where we continue to look for at least a mild recession next year, our forecast for growth in 2012 is modest, with our expectation being in the range of 2%. Should the presumptive decline in economic activity on the Continent prove worse than we now forecast, we would likely revisit our growth assumptions stateside in 2012, with a negative bias.
Also, the Committee decided to keep its target range for the federal funds rate at 0 to one-quarter of a percentage point. That was as expected. The Fed, though, said that it would look at the total picture before adopting any change in course. That observation was something of a disappointment to some Fed watchers, who had hoped the central bank would adopt further quantitative easing maneuvers. However, our sense is that the economic data are simply too strong, the threat for higher inflation down the road too great, and the bank's options too limited to go off on a new course, at this time.
Finally, the vote to continue along the current course was 9 to 1, with only Charles L. Evans, who supported additional monetary accommodation, dissenting.
At the time of this article's posting, the author did not hold positions in any of the companies mentioned.