The May FOMC statement contained only a few tweaks. The main change was in the policy section, where the FOMC moved to the following expression:
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
This was a slight change from the following formulation (which had been seen as a mildly hawkish tweak from January):
In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
So what does it mean? I think it means that some on the FOMC see the recent low inflation and slowing growth data as a sign that the Fed needs to be more aggressive. To reflect this, they are reminding some that the next move may be further easing.
As I pointed out yesterday, further easing is consistent with prior behaviour. On the two prior occasions when inflation has fallen this low, the FOMC has engaged in fresh balance sheet expansion (QE1 in 2009 and QE2 in late 2010).
Their economic assessment (up top of the statement) is little changed; however reading between the lines it seems that the Fed is less sure about the labour market, and more sure that tightening fiscal policy is slowing demand.
Overall, my guess is that the FOMC is more worried about the apparent slowdown in demand and inflation sag — but that they are wary of over-reacting to a single month of data (especially as data always seems to be seasonally weak this time of year).
I expect these changes may morph into a fuller easing bias over the next six weeks — if inflation continues to decelerate, and demand continues to slow.
Also some movement to numerical guidance for rate of flow of OM purchases:
Starting to sound a bit like JPY central bank.
Interesting that Bernanke also tips his hat towards the uncertainty about the effectiveness of the policy.
Yeah, it seems that maybe they are about to start moving their asset purchase volumes as conditions vary. Should make the meetings more interesting!
If you look at the latest, recently released, Index of Commodity prices in AUD terms, we are now at 86. We were at around 70 in 2006 and 2007 and more than 100 in 2011. So we are now 20% higher than in 2006. About inflation rate? Hardly a “boom” mark II. Maybe RBA will cut in May already? They must be getting ready to go again.
This would confirm the “Sumner critique” – that monetary policy trumps fiscal policy.
“Not Enough Inflation” says Krugman
The funniest bit is this one:
“Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.”
What? So the idea is that we should spend because prices always go up? And that’s how we create demand? 1% vs 2% inflation makes “consumers” rush to the shops? Yeah, sure.
“Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low. ”
So the problem is not that we had too much debt, wasted on the wrong investments and “because prices always go up”, the problem is that we now need more of it?
This is a much better analysis instead, although he forgets to mention Chin’s role.
Krugman is a polemicist; you won’t learn anything reading him. Good to see strong NFP last night, including the upwards revision.
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