The Federal Reserve announced it would keep Fed funds at a target rate of zero to 0.25%. No surprise. The economy is weak and the central bank intends to hold nominal rates at virtually nada for the foreseeable future. Tell us something we didn’t know. How about detailing more of the internal thinking on the contentious issue of whether the Fed is set to roll out more quantitative easing (QE), such as buying Treasuries. QE, in its various forms, is the only policy option left at the zero bound and Bernanke and company appear to be laying the groundwork for rolling out a new round of this monetary medicine…maybe. Okay, that’s a bit more intriguing.
Yesterday’s FOMC statement noted that while inflation is currently “at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the bank made it clear that it’s “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
By FOMC rhetorical standards, those are fightin’ words. Of course, it remains to be seen if they remain all talk with no additional action.
Reacting to the Fed’s commentary, economist David Beckworth wrote that “this afternoon a slumbering giant with a formidable arsenal of economic weapons began to awake.”
In other words, deflation doesn’t have a prayer. Does the crowd agree? “I think it’s still a close call and that in the end there will be enough positive signs to stop them” from deploying QE2, said Jim O’Sullivan, chief economist at MF Global, via FT.com. The numbers in the upcoming economic news, in sum, won’t support an all-out fight against the D-risk.
Meantime, if the Fed’s statement was designed to juice up the animal spirits on the inflationary front, there seems to be some reward for the effort. Gold popped yesterday, with the SPDR Gold Trust (GLD) gaining 0.9% in Tuesday trading in New York. In sympathy, the dollar fell, with PowerShares DB US Dollar Index Bullish (UUP) slipping 1% on the day. In addition, the Treasury market’s inflation outlook ticked up a bit, rising to 1.83% from 1.78%, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries (using government numbers). That’s still a long way from the 2.45% level of late-April, but for the moment at least the deflationary argument is a bit weaker.
Ultimately, much depends on the future trend in the labor market, opined Vincent Reinhart, a resident scholar at the American Enterprise Institute and a former director of the Fed’s division of monetary affairs. Speaking on a Bloomberg radio show yesterday he said: “If the unemployment rate does stay up in the neighborhood of 9.5%, ultimately Fed officials are going to say they’ve got a reputational risk, that if they’re not seen as acting in a time of severe macro distress their reputation will be impaired.”
But without foresight of the economic numbers scheduled to roll out in the coming weeks, the guesses about what happens next, and whether it’s prudent, are inevitably all over the map. Consider this sampling of commentary from dismal scientists on the Fed’s FOMC statement yesterday. No matter your outlook or monetary preference, a bit of window shopping is sure to provide something that you like, or not.