The FOMC finished its interest rate meeting and held rates steady as expected. This follows up from our post earlier today previewing the FOMC rate decision.
The focus was on how the Fed assessed the economic recovery, what its saw in regards to inflation, and what clues today’s statement had in regards to exit strategy.
A Shift in Inflation
The Fed shifted its view on inflation modestly in today’s statement. While underlying inflation remains low, the Fed added extra concern about rising commodity prices.
Policymakers now say “the recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.”
That means the Fed will watch not just underlying inflation, but also consumer inflation expectations – which we can see via the University of Michigan surveys. We can also look at the movement of Treasury Inflation Protected Securities or (TIPS) which are Treasuries that are indexed to inflation.
Step Towards Removing “Extended Period” Language
The FOMC also took a step towards removing the “extended period” language – its commitment to keeping interest rates low. The FOMC dropped the view that progress toward reaching the Fed’s dual objectives “has been disappointingly slow” (as it said in the Jan. 26 policy statement.)
By dropping that language from the statement it means the Fed is coming 1 step closer to becoming more responsive to the improved state of the economy. The “extended period” language has come to meant that the Fed will keep rates at their levels for at least another 6 months.
Does Japan Add an Unspoken Downward Bias?
The Fed saw that the economy was strengthenting.
“Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.”
However, the Fed did not comment on the situation in Japan, as its still too early and we don’t know the impact on the global economy yet from the events in Japan.
If things turn towards the downside, while it may have a modest at best impact on US economy, it still brings with it a distinct downward bias to the outlook. That goes unmentioned by the Fed. While the talk of ending QE2 in the summer dominates, there’s now actually a greater chance the Fed could do more, if Japanese events truly take a turn for the worse amid continued energy price shocks.
