December 14, FOMC Policy Statement: Fed on watch-and-wait mode

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This post is a guest contribution by Asha Bangalore, vice president and economist at The Northern Trust  Company.

The Fed is essentially on a watch-and-wait mode.  The asset purchase plan of $600 billion of longer-term Treasury securities, known as QE2, was left intact and the program is set to expire in June 2011.  The Fed made small modifications to the November policy statement.  The pace of economic recovery is now seen as insufficient to bring down unemployment” vs. a more amorphous description in November that output and employment conditions are “slow.”  The Fed upgraded its view about consumer spending and depicted it as “increasing at a moderate pace,” while in November, the Fed saw consumer spending as “increasing gradually.” The retail sales report of November (see discussion below) justifies this modification.  The Fed indicated in November that “housing starts continue to be depressed,” which is now revised to read as the “housing sector continues to be depressed.”

President Hoenig of the Kansas City dissented again on the grounds that the level of monetary accommodation “would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”

Source: Asha Bangalore, Northern Trust, Daily Global Commentary, December 14, 2010.

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