The FOMC indicated an improved outlook for the U.S. economy.
- The Committee also decided to slow the pace of agency debt and MBS purchases, and extended the purchasing horizon for the program.
- Despite the improving economic outlook, the Fed continues to indicate its willingness to keep rate low for an extended period.
As had been widely expected by us and the markets, the FOMC decided to keep the fed funds rate unchanged at the 0.00% to 0.25% range, and reaffirmed its commitment to keeping the fed funds rate low for an extended period of time. However, the Committee shifted its outlook on the U.S. economy, while signalling that it will slowly terminate its quantitative easing program. On the economic front, the Committee gave a nod to the improving economic conditions by noting that economic activity has picked up following its severe downturn, which contrasts to the previous statement that simply stated that economic activity is leveling out. Indeed, while the Committee did not explicitly assert that the intense economic recession has ended, this reference was quite close
to saying that. The Committee continued to highlight the improved financial market and housing sector conditions; however, they noted that household spending remains constrained, despite evidence of stabilization. For the inflation assessment, the Committee continues to maintain its bias for inflation to remain subdued for some time on account of the substantial resource slack keeping a lid on cost pressures, though they no longer cite the now distant rise in energy prices. In terms of the quantitative easing program, the Fed decided to slow the pace of the MBS and agency debt
purchases, and extended the horizon over which the remainder of the committed $1.45 billion will be deployed from December to the end of the first quarter. This was akin to the approach taken to the wind-down of the Treasury purchase program at the last meeting, and similarly they indicated that this was done in order to promote a smooth transition in markets. Curiously, in this statement the committee noted that it will employ a wide range of tools to promote economic recovery and to preserve price stability, contrasting to the last statement that stated that all available tools will be used to the same end. To us, this is a signal by the Fed that it will continue to gradually reduce
the dose of the medicine that it will use on the economy. Overall, the main takeaway from the statement was the decision by the Fed to slowly wind down the unconventional monetary policy tools it has been using to resuscitate the ailing U.S. economy. However, in recognition that the recovery (at least at its initial stages) will be tenuous at best, they continue to indicate their willingness to maintain their support for the economy, as they nurse it back to health, though they will reduce the dosage. As such, we continue to maintain our bias for the Fed to keep the policy rate at the current level until early 2011, and an outright divestment of the assets obtained under the QE program in the near term remains unlikely.