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The Fed Holds Federal Funds Rate Unchanged Until Mid-2013, Also Leaves Door Open For More

Interest-Rates / US Interest Rates Aug 10, 2011 - 01:44 AM GMT

By: Asha_Bangalore

Interest-Rates

The one-day FOMC meeting concluded with an unchanged federal funds rate, no surprises here.  In light of a string of recent weak economic reports a downgrade of its economic outlook was also not a surprise.  The FOMC now sees “downsides risks the economic outlook” as having increased compared with its assessment in June.  The Fed depicted labor market conditions to have “deteriorated,” household spending to have “flattened out,” the housing sector as languishing in a “depressed” state and the supply chain disruptions due to the natural disaster in Japan explaining only part of the economic slowdown. 


The Fed has now adopted an ultra easy monetary policy stance.  First, the Fed has noted that economic conditions “warrant exceptionally low levels for the federal funds rate at least through mid-2013.”  The Fed had other options about how it could indicate that the extended period was more than 2-3meetings but it chose to be specific about the timeframe.  

Second, the June policy statement read as follows with regard to the balance sheet of the Fed:  “The Committee will regularly view the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”  Today’s statement shows noteworthy changes:  “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”  The Fed has essentially not ruled out QE3 and the option to lower interest rate on excess reserves if economic conditions call for further support.  The FOMC vote was not unanimous for these changes.  Presidents Fisher, Plosser, and Kocherlakota would have preferred not to redefine the extended period language.  Three dissents at a FOMC meeting were last seen in the Greenspan Fed in November 1992.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Copyright © 2011 Asha Bangalore

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.


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