A More Uncertain Outlook
Two things have happened since the Fed's last meeting: the economic situation has improved, but inflation has decelerated. And so, from the Fed's perspective, we are still in a situation where we don't have enough jobs, we have high unemployment, and inflation is still uncomfortably low from their perspective. You add to that mix the economic situation in Greece, and all of a sudden, the outlook is more uncertain. And that clearly solidifies the Fed's view that it's absolutely right to stay on the sidelines. And so the Fed's statement is about hedging the downside of risks and growth because it's got plenty of latitude on inflation.
We Had a Major Earthquake
The Fed is saying we don't know what's going to happen next and we don't want to start tightening and then have a secondary financial crisis and have to go back again and reverse course. They understand how precarious the gains that we have made are, that although the recovery looks better, it is still very uneven and it has yet to deliver a lot of jobs. When you're in a financial crisis, there are always aftershocks. And we had a major earthquake.
The Credit Recovery Continues to Be Uneven
The Fed's statement about its portfolio reaffirms that they're going to continue along with the last piece of its measures to increase liquidity -- the commercial mortgage-backed securities program. They never really bought that much of, so it's kind of irrelevant. But they're essentially saying, we're not doing extraordinary things anymore, and things look good enough to go ahead and back out of those things. The unevenness of the credit recovery is remarkable, though. If you're a large corporation, you get access to credit very easily now. If you're a small business, you can't. Community banks are in worse shape than they were because they are now feeling the aftershock of the recession and they're going down while the big banks are stabilizing. But lending has yet to pick up.
Rates May Not Rise Until 2011
The Fed's not about to do anything anytime soon. I expect they might do something at the end of the year, but depending on what happens over the summer with the situation with Greece, Portugal, Spain, Italy, and Ireland -- the PIIGS of Europe -- they may not do anything until the beginning of 2011.
Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic news and developments. Her responses are edited for clarity and length.