March 15 FOMC Meeting – Fed somewhat more bullish

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

The Fed left the federal funds rate unchanged at 0%-0.25%, as expected and indicated it would continue its quantitative easing program of $600 billion.  There were no dissents at the meeting, despite disagreements among members about the quantitative easing program that is underway, as revealed in the minutes of the January meeting and subsequent speeches of Fed Presidents.

The Fed’s latest assessment of the U.S. economy is more bullish compared with its view published in January.  With the regard to the overall economy, the Fed indicated that the “economic recovery is on a firmer footing.”  In January, the Fed noted that the “economic recovery is continuing.”  Labor market conditions are now described as “improving gradually” vs. the view at the prior meeting when the recovery was viewed “insufficient to bring about a significant improvement in labor market conditions.”

Higher energy and commodity prices were seen as problematic but the Fed views these effects as “transitory” and it is following closely the “evolution of inflation and inflation expectations.” In this context, the Fed also stressed that “inflation expectations have remained stable and measures of underlying inflation have been subdued.”  Inflation expectations (see Chart 1) have reversed the sharp increase following the crisis in North Africa and the Middle East in the past four trading days; inflation expectations, as measured by the difference between the nominal 5-year Treasury note yield and 5-year inflation protected security, was 217 basis points as of March 14, down from 231 basis points on March 8 (see Chart 1).

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, March 15, 2011.

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