FOMC Statement of August 1, 2012

The Federal Open Market Committee (FOMC) released its statement today regarding the economy.  It stated that information received since June "suggests that economic activity decelerated somewhat over the first half of this year."  With that said, there was no announcement of a new quantitative easing (QE) or any other kind of major stimulus.  The stock market was only down slightly on the news.

The statement said, "The Committee anticipates that inflation over the medium term will run at or below the rate it judges most consistent with its dual mandate."  I find it hard to believe that they believe this.  If inflation is expected to be at or below its dual mandate and the economy is still showing weakness, then why wouldn't the Fed inflate more?

As I have discussed recently, the Fed is holding back right now on purpose.  The monetary base has been flat for over a year now.  They are walking on a tightrope right now and they would prefer a controlled liquidation over any of the other options.  The Fed is saving any additional QEs for something more major than a minor stock market downturn or 8% unemployment (at least based on the government's statistics).  In addition, as I recently discussed, the Fed does not care about re-electing Obama.

The Fed will buy more government debt to keep rates low and to keep the big banks afloat.  Right now, rates are at or near all-time lows and the banks are still technically solvent.  Therefore, the Fed will wait for something more major before creating more new money out of thin air.

The FOMC statement said, "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate more consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

This means that the federal funds rate will be near zero for at least 6 years.  That is unprecedented.  However, it is misleading for the FOMC to say that it is being highly accommodative by keeping rates so low.  While the original Fed monetary inflation contributed to the situation, it is not really the Fed that is holding rates low now.  The federal funds rate is near zero because the banks have built up massive excess reserves.

The FOMC decision was almost unanimous, with one person dissenting because he "preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate."

Yes, these are the people controlling our economic future right now.  It is not consoling.  The good news is that I don't think the Fed/ FOMC will go to hyperinflation.  I see that with their actions now.  If I see anything new that changes my mind, I will be sure to write something about it.  But for now, the Fed is sitting tight and we should too.