The FOMC completed their meeting today, with little change. Easing monetary policy further, as a result of weakening U.S. economic data in the past few months, was not voted for, although they keep the option open and the possibility of such action at the September meeting remains relatively good. The language of their press release changed from ‘prepared to take further action’ to ‘closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed’—a small change in terms of language, but meaningful, nonetheless. TheFed is careful with the wording of their language as they know it is watched for interpretation quite closely.
The chances for further easing action are certainly higher now than a few months ago. Markets weren’t extremely happy with today’s result, but that is also largely to be expected. Short-term stimulus has been generally bullish for stock prices, while inaction is a bit disappointing to some wanting a quick boost. But, from a broader perspective, over time, an economy requiring less stimulus is preferable to one that needs more, so the lack of action could be viewed as more of a positive signal in many respects—we’re growing slowly, but not on life-support by any means.
With interest rates near zero, there are not many ‘conventional’ options remaining, so the focus remains on the more ‘unconventional’ easing activities. These actions would be targeted to either or both breadth (deeper) and timeframe (longer). As there is not a lot of further ammunition the Fed can readily use to ease, these may include keeping rates low using bond purchases and/or paying lower levels on reserves to banks to spur credit, among a few others.
This process has obviously been frustrating for officials looking for a lever that immediately leads to the intended outcomes of better and consistent economic growth and improved employment numbers. In one sense, staying accommodative has allowed Bernanke to implement one lesson he learned in his extensive studies of the Great Depression—not implementing counterproductive measures like raising rates too soon—leaving things alone for longer continues to be his preferred approach. Financial deleveraging after a major crisis event can take more time than normal recoveries, and we may only be partially through that process of ‘muddle-through.’ It does seem to be happening, however.