Fed Day continues, in what has been a smorgasbord for investors and economists. Soon after the Fed released its latest monetary policy statement, it also released a batch of economic projections – downgrading economic growth forecasts slightly for 2012 and 2013 – and announced an inflation target of 2 per cent. The cherry on top: Ben Bernanke sat down for another press conference.
The lead question was the most obvious. Despite the recent batch of upbeat economic news from the United States in recent months, the Fed remained relatively downbeat about the economy in its latest monetary policy statement, with no mention of the big dip in initial jobless claims last week. Does the Fed harbour doubts about this upbeat news?
Mr. Bernanke responded by noting that retail sales have been weak and there remain headwinds from Europe. He hopes the recent trend of better-than-expected news will continue, but said that the Fed is “not ready to declare that we’ve entered a new and stronger phase.” In response to another question, he said that rates would remain exceptionally low even if the economy proved stronger than expected.
Stocks have been reacting well to this flurry of activity from the Fed. In late afternoon trading, the Dow Jones industrial average was up 53 points or 0.4 per cent, to 12,729 – up about 150 points from its low earlier in the day, prior to the release of the Fed’s midday monetary policy statement.
Meanwhile, here are a few comments from observers.
Ian Shepherdson, chief U.S. economist, High Frequency Economics: “We think this [keeping its key rate exceptionally low through at least 2014] is a dangerous hostage to fortune; the economy will change beyond all recognition by late 14. The Fed is always slow to recognize turning points and we think they are now too cautious, expecting only “modest” growth as far as the eye can see. We see no mention of the sustained surge in bank business lending, the rebound in survey data, the upturn in every housing indicator and only a tangential reference to the plunge in the pace of layoffs. The markets face two dangers if these emerging trends persist. First, the Fed might have to renege on its ‘promise’ – the word ‘likely’, after all, is not a solemn vow – or, second, they might tighten by reversing QE, while sticking to zero rates. Either way, fingers get burned in the markets.”
Krishen Rangasamy, senior economist, National Bank of Canada: “While the growth downgrades aren’t particularly reassuring, markets are loving the Fed’s promise of low rates for longer.”
David Watt, senior currency strategist, RBC Dominion Securities: “The market was caught off-guard by the statement that economic conditions 'are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.' ... ‘Late 2014’ greatly extends the period from the prior ‘mid-2013,’ suggesting a great deal of underlying angst at the Fed, and naturally turning the focus toward other central banks poised to make key policy decisions in the short term, such as the Bank of England.”
Chris Jones, economist, Toronto-Dominion Bank: “Today’s monetary policy action is unlikely to be an economic game changer. Rates are already at historic lows, and the problem at this point isn’t so much the price of credit; it’s the demand for it. Over-indebted households are still in the process of deleveraging, and businesses have adopted a wait-and-see attitude towards new investment in the face of macroeconomic uncertainties. While today’s announcement should provide some push at the margin, it is unlikely to alter economic momentum in a significant way.”