Fed Eyes Moderate U.S. Economic Recovery Before FOMC Meeting
At its meeting next week, expect the Federal Reserve to proceed with its already-stated policy of a low federal funds rate and scheduled purchases of securities.
In the run up to the Federal Open Markets Committee (FOMC) meeting on December 15 and 16, Federal Reserve Chairman Ben Bernanke has been signaling that he still expects only a moderate U.S. economic recovery in 2010, which will result in only a modest decline in unemployment.
He has also been intimating that he fully expects that the large gaps presently characterizing the U.S. output and labor markets will keep inflation well contained. As a result, it would be highly surprising if the FOMC were to change its announced policy of keeping the federal funds rate at between 0-0.25 percent for “an extended period.”
It would also be surprising if the FOMC were to announce any change to its announced schedule of buying $300 billion in U.S. Treasuries and $1.25 trillion in mortgage-backed securities.
While the FOMC will most likely keep interest-rate policy on hold, it will likely voice concern about the recent weakening of the U.S. dollar and the frothiness of various financial and commodity markets. This could induce the FOMC to emphasize that it is closely monitoring financial market developments.
It could also lead the FOMC to reiterate its readiness to start executing a timely exit from today’s highly accommodative monetary policy stance once there are clearer signs that the economic recovery is gaining traction.
The following are among the economic indicators on which the FOMC will focus:
- Real GDP estimates suggest that the U.S. economy bottomed out in the third quarter of 2009 under the impetus of the fiscal stimulus package and the moderation in the inventory cycle.
- Indicators of final demand suggest that the economic recovery could moderate by mid-2010 after the fiscal stimulus has peaked and after the inventory cycle has run its course.
- Retail sales appear to have leveled off at a relatively depressed level and suggest a subdued level of overall consumer spending in the months ahead.
- Consumer confidence continues to be constrained by job insecurity and remains at a relatively low level.
- Clear indications of a significant pick up in residential construction have yet to manifest themselves.
- The increase in unemployment has slowed markedly.
- The very high rate of overall unemployment (including involuntary part-time workers) suggests large gaps in the U.S. labor market that will contain inflation.
- Large labor market gaps are significantly constraining wage growth.
- Inflation remains well contained and well within the FOMC’s tolerance band.
- Bank lending continues to decline, which has particularly constrained small and medium-sized businesses.
- The dollar has retreated by around 15 percent from its March 2009 highs and is threatening to take out new lows.
- Credit market developments suggest that there has been a substantial decline in risk aversion.
Desmond Lachman is a resident fellow at the American Enterprise Institute. Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney.
Topics: bank lending, Ben Bernake, commodity markets, construction, consumer confidence, credit markets, demand, econnomy, economic indicators, economic recovery, FED, federal funds rate, Federal Reserve, fiscal stimulus package, Governance, government, inflation, interest rate, inventory cycle, jobs, labor market, Labor Markets, monetary policy, mortgage backed securities, Real GDP, retail sales, securities, U.S., U.S. dollar, U.S. output, U.S. Treasuries, unemployment, United States
Print This Article in Plain Text
|
|
Latest Headlines
- Osama Bin Laden Dead?
- Florida To Share $1 Billion For Gulf Coast Restoration Efforts
- Texas Prays For Rain During Extreme Drought Conditions
- Governor Christie Takes Action To Reduce Diesel Emissions, Improve Air Quality
- Governor McDonnell Outlines Draft Transportation Improvement Program
- Alaska Energy Bill Passes Legislature
- Illinois State Building Receives ENERGY STAR Award
- Homeland Security Begins Using National Terrorism Advisory System
- U.S. Outlines New Health Insurance Options For Graduating College Students
- Electrolux Expands In North Carolina, To Create 200 Jobs In Charlotte
- Virginia Storm Victims To Receive Tax Extension
- U.S. Expands Broadband Investment For Rural Areas To Accelerate Job Creation
- U.S. To Invest $130 Million For Advanced Energy Research
- Michigan Passes “I’m Sorry” Bill
- Kentucky Sells Two State Aircraft To Save Taxpayer Dollars
