• Home ::
• Fundamental ::
• Interest Rates ::
• FOMC: low rate of resources utilization warrant zero-interest rate policy

• Send
• Print
• Add To
• Rss

a6a42df3-1581-4e51-a730-f35fff9bf837

4

0

FOMC: low rate of resources utilization warrant zero−interest rate policy

Thu, Nov 5 2009, 10:52 GMT
by Economic and Strategy Team

National Bank of Canada

FOMC: low rate of resources utilization warrant zero-interest rate policy

As expected, the FOMC opted to keep interest rates unchanged. With respect to the assessment of current and future economic activity, the FOMC showed increased optimism. Over the course of past three meetings, its assessment of current conditions has changed from a “levelling out” to a “continued pick-up” in activity with the support of household spending. Despite the improving economic backdrop, however, the central bank reiterated its commitment to keep rates exceptionally low for an extended period of time on the back of its assessment of the inflation outlook. More specifically, the press release emphasized that low rates of resource utilization (read unemployment rate) combined with subdued inflation trends (low unit labour costs) and stable inflation expectations were the three conditions that warranted keeping the current policy stance unchanged.

Bottom Line:

This press release retains the status quo for capital markets. By leaving unchanged its guidance on interest rates, the Fed is keeping the reflation trade alive. By making reference to business investment and staffing in the same sentence, the FOMC recognizes the very close link between these two variables. We could not agree more with this view. This relationship is central to our scenario calling for a sustainable economic recovery. We note that business spending actually showed initial signs of firming with spending on machinery & equipment rising in Q3 (+1.1%), the first increase since the onset of the recession. This is a positive development that heralds an improvement in labour market conditions. But until the FOMC actually sees job creation, its dual mandate binds it to a zero-interest rate policy.

• Download full report

Published on  Thu, Nov 5 2009, 10:55 GMT