December 13, 2011
Liz Ann Sonders
Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
Key Points
- There were no surprises out of the Fed meeting today, with short-term interest rates remaining pegged at zero.
- There was one dissenting FOMC member who wished for additional policy accommodation.
- Much of the Fed's near-term focus remains on the eurozone debt crisis.
The Federal Open Market Committee (FOMC) held its final meeting of 2011 and went out with a bit of a whimper. There were very few changes in its statement relative to November's, although it did mildly upgrade its assessment of the economy: "The economy has been expanding moderately, notwithstanding some apparent slowing in global growth." The Fed also gave a nod to recent improvement in jobs: "While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated."
However, the Fed did downgrade its assessment of the investment climate: "Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed." This last comment about housing was a touch perplexing given what it didn't contain: any nod to the fact that in the past month there have been strong readings for mortgage applications, easier mortgage lending conditions and a surge in homebuilder sentiment.
There was one dissenter—Chicago Fed Bank President Charles Evans—who wanted further easing. This was his second consecutive dissent, supporting "additional policy accommodation," according to the statement. "There's simply too much at stake for us to be excessively complacent while the economy is in such dire shape," Evans said in a speech last week in Indiana.
No QE3, but Operation Twist affirmed
Surprising to us has been the fact that there's been some chatter about the Fed considering a third round of quantitative easing (QE3). We've felt since the Fed's announcement of "Operation Twist" in September, it was unlikely to follow up so soon with QE3. The Fed has basically said the risks were too high and it was disinclined to expand its balance sheet any further.
The Fed did note it would continue its exchange of $400 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, the move referred to as Operation Twist, which doesn't expand the Fed's balance sheet. And of course, the economy has improved markedly since September, with the unemployment rate down to 8.6%.
Across the pond
But the US economy isn't all that's on the minds of Fed policymakers. They've sounded increased warnings about the eurozone debt crisis, and in today's statement noted: "Strains in global financial markets continue to pose significant downside risks to the economy outlook." On November 30, the Fed led six global central banks and announced a 0.5% cut in the cost of emergency dollar funding for banks, with the money coming from the Fed's currency swap lines. Over the subsequent week, the European Central Bank's three-month dollar lending through the swap lines jumped to nearly $51 billion, up from $400 billion before the announcement.
New communications strategy coming?
There'd been some pre-meeting speculation that the Fed would begin to outline a new communications strategy, having noted in the minutes following the Fed's November 2 meeting that "such accommodation would likely be more effective if it were provided in the context of a future communications initiative." We didn't get any details out of today's meeting, and that may be a function of its one-day length, versus the longer two-day meetings during which meatier topics are typically discussed. We'll be looking for more detail about that in late January (2012's first FOMC meeting takes place January 24 and 25), if not before then.
What would be the purpose of a revamped communications strategy? Fed Chairman Ben Bernanke has consistently stressed, "…for central banks with policy rates near the zero lower bound, influencing the public's expectations about future policy actions became a critical tool." In other words, when rates are already pegged at zero, one of the few tools left is words. More to come on that as we approach the Fed's next meeting.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
