Wednesday, December 14, 2011

Fed Offers Nothing New

Those keeping tabs on the Federal Reserve’s movements were looking for a change in the central bank’s communication strategy when officials emerged from their final policy meeting of the year on Tuesday. Some analysts were even anticipating the Fed to launch a third round of ‘Quantitative Easing’ measures.

All expectations went unfulfilled, as the nation’s central bankers announced no new policies or economic stimulus programs, and stuck to their traditional messaging surrounding forecasts for short-term interest rates.

In its policy statement issued following the meeting, the Fed reiterated that it will keep the federal funds rate – the rate at which banks lend to one another – in the range of 0 to 0.25 percent at least through the middle of 2013. The benchmark rate has not budged in over three years.

Analysts were hoping for more definitive guidance that tied expectations for the rate increase to specific targets for indicators such as inflation and unemployment.
Fed officials said they are prepared to employ the tools in the central bank’s arsenal to promote a stronger economic recovery should it be determined that additional stimulus is needed, but at this time, no new policy actions were enacted.

The Federal Reserve’s policy committee said information received since it last met in November suggests “the economy has been expanding moderately, notwithstanding some apparent slowing in global growth.”

The Fed’s statement cited “some improvement in overall labor market conditions” but stressed that the unemployment rate “remains elevated.” The committee said it continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.

According to the committee, household spending has continued to advance, and longer-term inflation expectations have remained stable. The housing sector, however was described still “depressed.”

Dan Green, whose daily blog covers mortgage rates and market trends, notes that Wall Street wasn’t expecting no policy change and no QE3, and in response, mortgage rates dipped to new lows following the Fed’s (non) announcement.

The Fed said it will continue to extend the average maturity of its securities holdings as announced in September, and will maintain its existing policy of reinvesting principal payments from its holdings of GSE debt and agency mortgage-backed securities into new mortgage bonds

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