Wednesday, November 2, 2011

Fed's policy decision

The Fed didn't make any changes in policy; leaving in place Operation Twist, reinvestment of interest on US Treasury bonds into mortgage-backed securities, and reiterating that it expects economic conditions to warrant exceptionally low interest rates through mid-2013.  A couple of items of note in the FOMC statement are that economic growth did pick up somewhat in the third quarter, but that "there are significant downside risks including strains in global financial markets."  In other words, it's paying close attention to what's going on in Europe and how it's affecting the global financial system.  In addition to its statement, the Fed released its latest economic forecast (actually, the forecasts of the 12 regional Fed districts).  Economic growth is expected to pick up slightly in 2012 (2.5-2.9%) and increase further in 2013 (3-3.5%), resulting in a slight decline in the unemployment rate to 8.5-8.7% by the end of 2012 and 7.8-8.2% by late 2013.  Inflation is expected to moderate in the coming years, with both core and overall inflation coming in at 2% or less through at least 2014.

Is there any big news coming out of the meeting?  Not really.  The Fed's forecast is now inline with those of private forecasters (it updated its forecast months ago but didn't make it public until today).  If its forecast holds true, the Fed will probably continue its current policy, so QE3 or any other significant easing is unlikely, barring a surprise.  What could go wrong?  The Fed remains quite concerned with what's going on in Europe and is prepared to act in the event that the European debt crisis significantly hurts the US economy.