Fed leaves policy rate steady, presents slightly more upbeat assessment of economic outlook

June 24, 2009

The FOMC's statement offered a slightly more upbeat assessment of the economy. While their comments still echoed their April assessment that the outlook for economy has improved, today's statement added more emphatically that the "pace of contraction is slowing" rather than "appears to be somewhat slower."  This assessment didn't surprise anyone nor did their decision not to adjust the target for the Fed Funds rate, which will remain in the current 0 to 0.25% range.

 
While the tone of the statement was firmer with respect to the outlook for the economy, the Fed acknowledged that the economy will be weak "for a time" and did not provide a more definitive timeline for the policy rate but reiterated that the policy stance would be maintained "for an extended period." On their credit and quantitative easing initiatives, the Fed made no changes. On the inflation outlook, the Fed still looks for inflation to "remain subdued for some time" but did not reiterate concerns about significant downside risks for prices as they did in April.

Once again the FOMC members stated that they will "evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets." Also in the same vein as the April statement, the FOMC said it "is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." 

Interest rates along the yield curve have drifted higher in recent weeks, which likely is of concern to policymakers because the increases pose a threat to the tentative signs that the economy is stabilizing.  For now, the Fed appears content to allow its current game plan to address this deterioration stand having provided the market with a loose promise to keep rates low - they did not provide a detailed time table like the Bank of Canada - as well as continuing to purchase agency debt, mortgage-backed securities and government bonds. The statement implied that these policies were having an impact as financial markets conditions were deemed to "have generally improved in recent months." We look for the combination of low interest rates and the flow of government spending to yield results later this year with the economy forecast to emerge from the current recession and build momentum in 2010.

 

U.S. Beige Book: Economy remains weak, but signs of moderation emerge

June 10, 2009

The Fed's Beige Book prepared based on data reported prior to June 2 reported that economic conditions remained weak or worsened through May. However five of the Fed districts saw the downward trend in activity showing some signs of moderation.

 

The current conditions remaining weak related to credit conditions, retail sales and commercial real estate. The report found that credit conditions remained "stringent" or "tightened further." On the retail sales the characterization was "soft." In terms of real estate, the report was decidedly negative on the commercial front, as it continued to weaken in all districts.

 

On the brighter side, with respect to residential real estate, though the report described it as "weak," it reported that contacts in some area reported an "uptick in sales." Labour markets "stayed weak," but some districts saw signals that employment losses may be "moderating." Additionally, several districts saw manufacturers' outlooks improve.

 

With regard to inflation, prices at all stages of production were reported to "flat or falling." The notable exception cited was the increase in the price of oil. Additionally, the report noted wages to be similarly "falling or flat."

 

Overall, today's report paints a picture of a weak economy whose downward trajectory is showing signs of moderating. In its upcoming scheduled June 23 -24 meeting, we expect the Fed to maintain its target rate in the 0% - 0.25% range while focusing on both quantitative and credit easing.

 

Fed downgrades 2009 growth forecast, but cites signs of improvement in recent data

May 20, 2009

 

The minutes of the April 28-29 FOMC meeting presented a modestly more upbeat assessment on the current state of the economy. Consumer spending activity was noted to have picked up and the housing market "remained depressed but seemed to have leveled off". Business spending and labour market conditions however continued to deteriorate.  The discussion highlighted an easing in credit market strains as evidenced by narrower bid-ask spreads in fixed income markets, improved conditions in funding markets, the rise in stock prices, and narrowing in spreads on corporate bonds. Despite these signs, credit growth remained stunted with weak loan growth to households and commercial credit contracting. 

 

While the tone of the discussion appeared to be lighter than at previous meetings, the bottom line remained that the economy is in a weakened condition and the economic projections for 2009 and 2010 were actually revised lower. Any recovery was expected to be relatively restrained as the healing in credit markets would be gradual; households would remain cautious and work to rebuild savings and the impact of the fiscal stimulus would "diminish over time". Members saw signs that the pace of the economy's contraction started to slow in the second quarter and expect that the economy will begin to recover in the second half of 2009.

 

The unemployment rate forecast was increased in both 2009 and 2010 with the forecast range boosted by 1% to 1.2% in 2010. Both the all-items and core inflation rate forecasts were increased modestly in 2009 but were little changed for 2010.

 

The minutes indicate that the members thought that the previously announced amounts of the credit and quantitative easing programs were "appropriate" and deemed that these purchases "were providing financial stimulus" to the economy. While some acknowledged that an increase in the size of the programs "might well be warranted at some point" no change to the limits was suggested at the April meeting. The committee members unanimously agreed to wait and see the impact of the current program "before deciding whether to adjust the size or timing of asset purchases."

 

Fed says "economic outlook has improved modestly"

April 29

 

The Fed presented a slightly more upbeat assessment of the outlook for economy in today's statement and said that the "pace of contraction appears to be somewhat slower" than when policymakers met six weeks ago. The Fed pointed to consumer spending having "shown signs of stabilizing". While the statement was a step-up from the glum picture painted in early March, the bottom line is that the economy remains weak and did not lead policymakers to adjust their view that the Funds rate will remain in the current 0 to ¼ percent range for an "extended period" or alter their initiatives re credit and quantitative easing.

The statement outlined the details of the current credit and quantitative easing programs. Those looking for an extension or adjustment to these programs were disappointed as the statement said only that "the Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets." The Fed also reiterated that "The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments." 

After today's report showing an unexpectedly sharp drop in GDP of 6.1% at an annualized rate in the first quarter, the statement was a breath of fresh air with policymakers focusing on the positive impact of the easing in financial conditions on consumer spending. On the current assessment of inflation, the Fed's statement echoed the March report. However looking forward, they reiterated the view that recent actions "will contribute to a gradual resumption of sustainable economic growth" though adding that this would occur within "a context of price stability." This addition seems to be aimed at addressing concerns that all the liquidity injections will eventually sow the seeds for a future inflation problem.

 

Almost half of Fed districts report moderation in pace of economy's decline

April 15, 2009 

 

The Fed's Beige Book  gave a half-hearted thumbs up to sentiment that there are signs of stabilization in the economy  albeit at very low levels. However there was only a smattering of positive comments with most of the area contacts still highlighting sluggish activity, tight credit conditions and falling employment.

 

Implications

The first paragraph of this month's Beige Book presented a marginally more upbeat assessment with "five of twelve Districts" indicating that the pace of decline moderated and that "several saw signs that activities in some sectors was stabilizing". Still the overriding theme of the report was that the area economies continued to be weak based on data collected on or before  April 6.

  

The District reports indicated that  consumer activity  "remained generally weak"; manufacturing  "continued to experience declines in a wide range of industries"; residential real estate " remained depressed overall " and commercial real estate  "weakened further".  However most of these comments were qualified by statements indicating that the pace of decline had moderated or that there were indications that conditions were stabilizing. Only the commercial real estate market did not show signs of stabilization or improvement. 

 

On credit  conditions, the Districts reported that credit remains tight and demand for loans  weak. The discussion indicated some pickup in residential real estate loans but commercial real estate and other loans softened. Concern about  credit risk and rising delinquencies were reported.  

Downward pressure on prices were  reported with most commodity prices  falling (except oil) and weakening demand  leading to retail discounting and service fee cuts.   On the labour market the districts reported "widespread" weakness.

 

Like many other reports lately, the Beige Book presents a glimmer of hope that the worst of the US recession has passed. To be sure, there are areas of the economy that remain under severe downward pressure but this is balanced with indications that the strains in other areas are starting to ease a bit. However importantly the outlook for labour markets  was still characterized as "generally bleak" meaning that a recovery is still some way off. Today's Beige Book corroborates recent data reports which hint that the housing market recession and consumer retrenchment may be entering their final stages which likely means steady-as-she-goes for Fed policy when the FOMC gets together later this month.

Minutes of March 17-18 FOMC meeting indicate the move to quantitative easing prompted by worsening economic outlook

April 9, 2009
 
Highlights
o The hallmark of the March 17-18 FOMC meeting was that it saw the Fed initiate a program of quantitative easing with the announcement "to purchase up to $300 billion of longer-term Treasury securities over the next six months." Today's minutes provided the rationale for the move though there was little hint as to whether this policy initiative would continue to be pursued.

o The move to quantitative easing was in large part prompted by growing downside risks to growth from already weak levels. These additional downside risks emerged due to "potential adverse feedback effects as reduced employment and production weighed on consumer spending and investment." This was viewed as having the potential knock-on effect of boosting "losses of financial institutions, leading to a further tightening of credit conditions."

o With respect to inflation, the minutes revealed that all participants felt that pressures would remain subdued though several members saw inflation would likely persist lower than expected. Thus risks to both growth and inflation were pointing to the need for further easing.

o With interest rates already abutting 0%, the FOMC members "agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate." The issue was which assets should see increased purchases. Today's minutes revealed a single member felt that additional purchases should focus on long-term Treasuries while another member argued in favour of a bias towards agency mortgage-backed securities (MBS). A compromise was struck by opting for increased purchases of a broad range of assets including both Treasuries and MBS. The FOMC eventually announced a $750B increase in MBS purchases, introduced $300B for the purchase of Treasuries and $100B in other agency debt. The minutes indicated that the various members were willing to agree to this broad array given that "the effects of any one tactic were uncertain."

o The minutes provided little hint as to whether the FOMC felt that further purchases of Treasures or other assets was being contemplated at this time. The implication seemed to be that it would be determined by how the economic data played out between FOMC meetings.

o Discussion about the economy saw considerable emphasis placed on the very rapid deterioration in labour markets 'with steep job losses across nearly all sectors." The minutes also noted the rapid falloff in industrial production that reflected weakening demand and rising inventories. Also highlighted was the marked weakening in the external environment that was hampering export growth. These areas of intensifying weakness contributed to the Fed staff lowering growth through next year despite indications of consumer spending stabilizing early in 2009, albeit at still low levels.

 

 

Fed opts for quantitative easing in the face of somber economic outlook

March 18, 2009

 

The main question about the outcome of today's FOMC meeting was whether there would be any shift in the Fed position on the outright purchases of longer-term government Treasuries. Today's statement provided the answer that "Yes" it would undertake these purchases to the tune of $300 billion during the next six months.

This move indicates that the central bank is pulling out all the stops in trying to turn around the economic downturn by opting for the relatively aggressive quantitative easing on top of various initiatives at credit easing. The latter entails the more selective purchases of assets, in particular financial markets, although on this front as well the Fed indicated that they were expanding the amount of its purchases.

For example, it announced an additional US$750 billion in purchases of agency mortgage-backed securities (MBS) that would result in total purchases this year of US$1.25 trillion. The purchase of agency debt was increased by US$100 billion to US$200 billion. These initiatives to date have been largely funded by the Fed expanding its balance sheet and this will likely continue to be the case. In other words, the printing presses are running!

On the interest rate front, the Fed indicated that it would continue to maintain the 0 to ¼ percent range and would likely continue to do so "for an extended period." All policy actions were approved unanimously by the FOMC.

Justification for the Fed's increasingly aggressive actions was provided by a relatively somber assessment of the economy that it characterized as weak and continuing to contract since the last FOMC meeting in January. The Fed opted not to acknowledge some recent hopeful signs on consumer spending. It did allow that aggressive fiscal and monetary policy actions "will contribute to a gradual resumption of sustainable economic growth," although there was no indication of when. In January, the Fed indicated that "a gradual recovery in economic activity will begin later this year."

The discussion of inflation provided addition scope for aggressive policy easing. The central bank's base line forecast was for inflation to remain subdued. However, the main risk to this outlook was "that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

 

 

Fed Chairman Bernanke provides a sombre assessment of the economic outlook

Release date: February 24, 2009

 

The biannual Congressional testimony by the Fed Reserve has in the past been monitored closely because it provided an opportunity for the central bank to present its outlook for the economy. This role has been somewhat diminished since the Fed has started to release these projections with the FOMC minutes at various times through the year. Today's testimony makes reference to the projections released with the January 27-28 FOMC minutes that suggested declining GDP growth of ½% to 1 ¼%, on a fourth quarter-over-fourth quarter basis. However, today's testimony provided Bernanke an opportunity to update this earlier assessment, stating that the downside risks have started to largely outweigh the upside risks, implying the prospect of an even greater decline.
The greater pessimism about the outlook reflected two main factors. The first was that the global nature of the downturn was having a greater-than-expected downward hit to U.S. growth. The second factor was that the Fed seemed to be getting increasingly worried about the so-called "adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing." One of the main ways to sever this loop is for strong fiscal actions to counter weakening incomes and the Fed Chairman was likely taking the opportunity to keep Congress focused on providing this critical offset.

The Fed Chairman also seemed more vague about a return to positive growth, saying that "the current recession would end sometime in 2009 and that 2010 will be a year of recovery." However, even this more muted assessment was premised on the assumption that recent "actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability." This suggested a view that failure of these policy actions could result in declining activity continuing into next year. As well, in assessing the eventual rebound, the Fed Chairman expressed the view that "a full recovery of the economy from the current recession is likely to take more than two or three years."

The lion's share of the testimony was devoted to a review of the causes of the current downturn and actions taken by the Fed and other policymakers both in the U.S. and around the globe to stem the recession. The Fed took the opportunity to reinforce the view that, despite Fed funds currently abutting 0%, the Fed had other options to add further liquidity to the economy. This was largely a reference to so-called "credit-easing" where the central bank injects liquidity to specific areas of the financial system where activity by private sector participants has largely ceased. However, there was no mention in the text of Fed purchases of long-term Treasuries. The central bank reiterated the point that the severity of the downturn will keep interest rates low for some time.

 

Highlights of January 28 FOMC meeting minutes

February 18, 2009

 

As of late January, however, with financial conditions strained and the economic outlook weak, most participants agreed that the Committee should continue to focus on supporting the functioning of financial markets and stimulating the economy through purchases of agency debt and mortgage backed securities and other measures-including the implementation of the TALF-that will keep the size of the Federal Reserve's balance sheet at a high level for some time.

Conditions in short-term funding markets showed some signs of easing, although significant stresses remained.

 

Participants generally saw credit conditions as extremely tight, with financial markets fragile and some parts of the banking sector under substantial stress. However, modest signs of improvement were evident in some financial markets-particularly those that were receiving support from Federal Reserve liquidity facilities and other government actions.

In the forecast prepared for the meeting, the staff revised down its outlook for economic activity in the first half of 2009, as the implications of weaker-than anticipated economic data releases more than offset an upward revision to the staff's assumption of the amount of forthcoming fiscal stimulus.
The staff's projections of real GDP growth in the second half of 2009 and in 2010 were revised upward slightly, reflecting greater monetary and fiscal stimulus as well as the effects of more moderate oil prices and long-term interest rates, but they continued to show no more than a gradual economic recovery.

The staff again expected that unemployment would rise substantially through the beginning of 2010 before edging down over the remainder of that year.

Forecasts for core and overall PCE inflation in 2009 and 2010 were little changed, with growth in both core and overall PCE prices expected to be unusually low over the next few years in response to slack in resource utilization and relatively flat prices anticipated for many commodities and for imports.

Participants' projections for the change in real GDP in 2009 had a central tendency of -1.3 to -0.5 percent, compared with the central tendency of -0.2 to 1.1 percent for their projections last October.
Looking further ahead, participants' growth projections had a central tendency of 2.5 to 3.3 percent for 2010 and 3.8 to 5.0 percent for 2011. Participants generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped. Nonetheless, participants generally anticipated that real GDP growth would gain further momentum in 2011, reaching a pace that would temporarily exceed their estimates of the longer-run sustainable rate of economic growth and would thereby help reduce the slack in resource utilization. Most participants expected that, absent further shocks, economic growth would eventually converge to a rate of 2.5 to 2.7 percent, reflecting longer-term trends in the growth of productivity and the labor force.

Participants continued to view uncertainty about the outlook for economic activity as higher than normal.

 

Meeting participants discussed the potential benefits of conducting open market purchases of a substantial quantity of longer-term Treasury securities for the System Open Market Account. Participants generally agreed that purchasing such securities could be a useful adjunct to other monetary policy tools in some circumstances. One participant preferred to begin purchasing Treasury securities immediately, as a way to increase the monetary base, in lieu of expanding programs that aim to support particular segments of the credit markets. Other participants were prepared to purchase longer-term Treasury securities if evolving circumstances were to indicate that such transactions would be particularly effective in improving conditions in private credit markets. However, they judged that purchases of longer-term Treasury securities would only modestly improve conditions in private credit markets at present, and that completing already-announced plans to purchase large quantities of agency debt and mortgage-backed securities and to support certain asset- backed securities markets was, in current circumstances, likely to be a more effective way to employ the Federal Reserve balance sheet to support credit flows to, and spending by, households and businesses.

The minutes highlighted concerns about the near term economic outlook with conditions having weakened further since the committee last met in December. As a result, the forecast range for growth in 2009 was revised lower. The minutes provided a litany of releases  that highlighted the deterioration in the economy situation including: industrial production, housing starts and employment. Inflation is expected to remain low but to average 1.7% to 2% over the longer term. Despite the gloomy near term outlook, members remarked that there were some signs of improvement in financial markets and that they expect the heavy dose of fiscal and monetary policy stimulus will produce somewhat stronger growth in the second half of 2009 and in 2010 than in their October forecast. The minutes reconfirm the Fed's commitment to providing support to certain market sectors and concluded that at this time, direct purchases of longer-term Treasuries "would only MODESTLY improve conditions in credit markets" indicating that this tactic will likely remained shelved for now.      

 

Federal Reserve prepared to use its balance sheet to ease monetary conditions

January 28, 2009

 

 

With Fed funds already as low as they can go and trading in a range of 0 to ¼ percent, no further action was expected on the interest rate front coming out of today's FOMC meeting. The central bank reaffirmed these exceptionally low interest rates and reiterated the view that this range could be maintained "for some time."

 

The issue of purchases of long-term Treasuries re-emerged in the statement, which indicated that the Fed remained prepared to undertake such purchases if they would be "effective in improving conditions in private credit markets." However, it was of note that Fed President Lacker voted against the policy action announced today as he "preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs." This suggests that support for outright purchases of Treasuries was building within the FOMC, although majority support was still not there yet.

 

When the Fed first announced the lowering of interest rates to its current range on December 16, it emphasized the point that it could still ease further via its balance sheet through the expansion of the monetary base. Although today's policy action fell short of announcing the commencement of purchases of Treasuries, the accompanying statement provided updates on the alternative channels already opened to pump liquidity into the system.

 

The key channel is through Fed purchases of mortgage-backed securities (MBS) and agency debt where activity had earlier stalled badly as the willingness of private investors to hold securitized assets fell sharply. The statement indicated the preparedness to expand the quantity and duration of these purchases. The central bank also confirmed that it was poised to start purchasing Term Asset-backed Securities where activity had dried up for securitized non-mortgage loans similar to what had occurred in the MBS market.

 

The Fed's comments on the economy were not encouraging, indicating that conditions had weakened further since the committee last met in December. Specific releases cited that highlighted this deterioration included industrial production, housing starts and employment. The Fed summarized its comments on the economy by stating that it expected a gradual recovery to begin later this year but with the risks solidly stacked on the downside.