FOMC Policy Statement - Preview
The FOMC meeting is nearly certain to end without a change in the federal funds rate on September 23, 2009. Markets will be focused on the Fed’s purchase plan of mortgage-backed securities. Currently the program plans to purchase $1.25 trillion mortgage-backed securities by the end of the year; the Fed has bought two-thirds of the target amount. The $300 billion Treasury securities purchase program expires in October 2009; the Fed has on its books 94% of the planned purchase.
Given the nature of economic reports published recently, the Fed’s assessment of economic conditions is most likely to be modified to indicate that an economic recovery is underway, compared with the August statement that noted “economic activity is leveling out.” In addition to economic activity showing signs of recovery, net worth of households increased 3.9% in the second quarter, the first gain after six consecutive quarterly declines. Therefore, the evaluation of consumer spending is also a candidate for modification. The Fed is most likely to hold the inflation outlook unchanged – “inflation will remain subdued for some time.” The increase of the Consumer Price Index (CPI) in August was largely due to energy prices. Excluding energy, the CPI rose only 0.1% and the core CPI, which excludes food and energy, moved up 0.1%. The weak economic backdrop allows the Fed to knock inflation down a few notches on its priority list, for now.
The outlook for monetary policy ran as follows in the August statement:
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
There is room to wait before tinkering with this part of the policy statement. The depiction of the monetary policy outlook should be most interesting aspect of the policy statement.
The opinions
