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No Policy Changes But More Inflation Recognition at the FOMC


No Policy Changes But More Inflation Recognition at the FOMC

The second regularly scheduled FOMC meeting of 2011 ended this afternoon, and as expected the Fed decided to continue the same policy without any changes. There remains no signs of future rate hikes in the FOMC statement. The four main parts of the policy remain the same. These include:

  1. reinvesting principal payments from its securities holdings
  2. purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011
  3. maintain the target range for the federal funds rate at 0 to 1/4 percent
  4. exceptionally low levels for the federal funds rate for an extended period

There were some modifications in the statement compared to last month that suggests a future movement to a tightening policy and higher rates. The Fed painted a little more optimistic picture for economic growth in this statement. Also, the Fed put more emphasis on the recent commodity inflation, but it continues to say this isn't a major issue for "longer-term inflation expectations". However, the Fed mentioned that underlying inflation remains subdued. In January it said "measures of underlying inflation have been trending downward."

So with the Fed recognizing more economic growth and inflation, we may finally see some changes later this year. It probably won't be fast. Calculated Risk blog has a timeline of what's likely to occur at the Fed as it changes to a tightening policy. As can be seen, it will likely be slow with a rate hike unlikely in 2011.

The new FOMC voting members who were suppose to be inflation hawks voted with the rest of the committee in favor of this policy. The vote was unanimous. We will have to wait for later this year to see any dissent in their votes. If economic improvements don't come as quickly as hoped, most of the committee may push for QE3. That's the time that the inflation hawks may finally dissent. However, they're still in the minority at the FOMC so that may not prevent QE3 and a much longer delay of rate hikes.

Future FOMC Meetings

If you want an idea about what the market thinks regarding when the Fed will start hiking rates, check out this CME Group FedWatch tool. It shows the probability of rate hikes in the future FOMC meetings based on the 30-Day Fed Funds futures prices. The probability of a higher Fed funds rate by December is 28.7%. That's down from 49.4% after the last meeting. The chance of a rate hike is 47.5% for next January and 61.2% for next March.

The next two FOMC meetings are scheduled for April 26-27 and June 21-22.

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Anonymous   |     |   Comment #1
As usual, the fed ia asleep at the wheel. BB and his cronies haven't a clue on what they are doing, IMHO.
Anonymous   |     |   Comment #2
I think they have more than a "clue."  I believe they have been instructed to keep the rate at or near zero ad infinitum.  Why?  So we won't have to pay additional monies on the interest of the nations debt (which we already can't afford.)  As much as I'd like to see 5% again, I think these rates will become the "new normal."
Anonymous   |     |   Comment #4
I see the conspiracy theorists are out in force....