NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
April 27, 2011 FOMC Decision/Press Conference
“…the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.”
Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%
This was a very interesting day in the history of the Federal Reserve. There was a usual meeting but then the Fed released its updated forecast and for the first time in its history, the Fed Chairman had a formal press conference. Not surprisingly, not a whole lot of news came out of the new procedures but at least the Fed members are showing they are trying to better inform the public about the reasons and purposes of their policies.
Let’s start with the statement. As expected, rates were kept stable. The economy is hardly in any shape, given the surge in gasoline prices, to absorb a rate change or any indication that a rate change might be on the horizon. The Committee reiterated its view that it “continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” There was also an affirmation of the intention to complete QE2 on schedule. The clear message here is that there are no current expectations that QE3 will be needed.
There was, however, a small change in the description of inflation. The FOMC did acknowledge that “Inflation has picked up in recent months” though it still described commodity price pressures as “transitory”. It advised that “it will pay close attention to the evolution of inflation and inflation expectations.” In addition, the Fed’s estimate of core inflation was raised to a more realistic 1.3% – 1.6% range. The implication is that by the end of the year, core inflation could be about 2%. That is about as high as the members would like to see it given their long range forecast. As for growth, the members reduced their expectations for 2011 and for the next two years, though the adjustments were not large. The Fed members believe inflation will be higher this year and growth will be slower than forecasted in January.
Finally, there was the press conference. The Fed Chairman handled himself in the way expected: He presented his views in an expanded manner but didn’t ruffle any market feathers. He argued the Fed could pick the correct time to start raising rates but stated that the course of the economy would determine the timing. He noted that while short term inflation was a concern, inflation expectations were not rising enough to alter policy. He did comment that with inflation rising, it would be difficult to be more aggressive, so further aggressive actions are not likely, especially if his projection of stable or even falling gasoline prices occurs. He defended the Fed’s policy as it affects the dollar by simply arguing that stronger long term growth, which he believes will happen, would strengthen the dollar in the future. Basically, Mr. Bernanke made no mistakes, added little to what we know but did show, at least to the public, that he understands their concerns and would do the best he could to get the economy and payrolls growing faster.
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