subject: Some Thoughts on FOMC [print this page] In August the FOMC voted not to tightenIn August the FOMC voted not to tighten. By deciding to use the proceeds of the mortgage backed securities to purchase Treasuries the Fed prevented an incremental but de-facto tightening of their policy that would have occurred had they just sat on their profits.
It wasn't a move to easier policy, but just a reaffirmation of the status quo. But since that meeting the data has generally been weaker than expected and certainly indicating a slower economic scenario than the Fed had assumed would be the case, based on their forecasts. For instance, housing fell off a cliff, the Philly Fed has been negative for two months running, and consumer sentiment as measured by the U of Michigan Index is fell to a fresh one year low. The Beige Book that was prepared for use at today's meeting reinforced the turn in by noting that there were "widespread signs of a deceleration compared with preceding periods."
Because of these factors I think it is likely that the Fed will take their assessment of the economy down another notch in today's statement but I don't think they will take the next step and announce another the beginning of another round of Quantitative Easing. The data has been weaker but not awful and as a result it is probably fair to surmise that a statistical threshold that will thrust them into additional easing has not yet been breached. The CPI Core (+0.9%) has been at its lowest level since the sixties for five months running; had it fallen further in August it may have pushed them into action, but it didn't. The jobs data was nothing special; unemployment rose one tenth to 9.6%, but private sector employment was better than expected.
The One Year Ahead Inflation Expectation from the U of Michigan consumer report fell five tenths to 2.2%, something that will surely get noticed at the meeting, but I think the Fed is more interested in the Five Year Ahead inflation outlook because it relates better to core inflation measures and this held steady at 2.8%, something they will consider to be anchored and therefore not an immediate concern.
