Review On June's FOMC Minutes: Monetary Policy Sticking To The Status Quo

Written by ActionForex.com |  Jul 16 09 05:25 GMT | 

FOMC minutes for the meeting in June suggested the policymakers believed economic conditions have improved since April's meeting. However, the current conditions remained so vulnerable that the Fed decided not to change the stance of policy at the moment.

'Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year'.

'Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009'.

'Household wealth was higher, corporate bond rates had fallen, the value of the dollar was lower, the outlook for foreign activity was better, and financial stress appeared to have eased somewhat more than had been anticipated in the staff forecast prepared for the prior FOMC meeting.'
'The projected boost to aggregate demand from these factors more than offset the negative effects of higher oil prices and mortgage rates'.

These were probably the major reasons for FOMC and the staff to revise up the economic forecasts from 2009 to 2011. The central bank expected a contraction of -1% to -1.5% in 2009, compared with April's projection of -2% to -1.3%, before growth resumes in 2010 and 2011.Consumer prices are now estimated to rise by +1% to +1.4% this year, also higher than previous forecasts of +0.6% to +0.9%. However, employment condition is expected to be worse with unemployment rate this year rising to 9.8% to 10.1%.
Economic projections of Federal Reserve Governors and Reserve Bank presidents, June

1. The central tendency excludes the three highest and three lowest projections for each variable in each year.
2. The range for a variable in a given year includes all participants' projections, from lowest to highest, for that variable in that year.
3. Longer-run projections for core PCE inflation are not collected.

Concerning the asset purchase program, the members voted unanimously to stay as where they are on both the size and the timing the $1.75 trillion bond purchase program after considering a number of modification proposals including 'possible expansions in their size, extensions of the duration of securities purchased, steps to increase the flexibility of those purchases both within each program and across programs in response to short-term market developments, and possible approaches to winding down purchases as the programs near completion'. The Fed believed it has been 'purchasing a very large fraction of new current-coupon agency MBS and agency debt, and further increasing the scale of those programs could compromise market functioning…increases in purchases of Treasury securities might have little or no effect on long-term interest rates unless the increases were very sizable, given the large amount of current and projected supply of Treasury securities….announcements of substantial additional purchases could add to perceptions that the federal debt was being monetized'. Judging from the tone in the minutes, we think the Fed will not alter anything at the meeting In August.

In other words, the credit easing policy may be coming to an end.

The Fed also announced to keep its target range for the federal funds rate at 0-0.25% and stated that it will be maintained at 'an exceptionally low level' for 'an extended period'. This signaled that, despite most optimistic economic outlook, the Fed is not going to increase interest rate at least until late 2010. We believe the overhang lies on the employment condition.

Historically, the Fed seldom raised its policy rate when unemployment remained on the rise. Rather it will hike interest rate after the unemployment rate had turned modestly lower. According the economic projection, unemployment rate will rise to 9.8% to 10.1% in 2009 followed by a decline of 9.5% to 9.8% in 2008. We think the earliest rate hike will be in 2H10, subject to evolvement in market conditions

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