Typically, Fed watchers divine the Board's changes in attitude from small changes in the wording of the press release of each FOMC meeting. For instance, in comparing November to September, the view that
...economic activity has continued to pick up.is replaced with
...economic activity has continued to pick up, and that the deterioration in the labor market is abating.Less bad, in other words. Other subtle shifts include: income growth has progressed to "modest" from "sluggish;" and financial markets are "more supportive" rather than September's "unchanged."
But the message to the markets on interest rates, unanimously agreed by the Fed governors, is that they still need to be near zero to get businesses going again.
Based on favorable economic reports preceding the Fed meeting, however, Wall Street economists boosted their estimates of U.S. GDP growth by a full percentage point, reports Bloomberg:
JPMorgan lifted its estimate to a 4.5 percent annual growth rate in the final three months of 2009, compared with a previous prediction of 3.5 percent. Goldman economists increased their estimate to 4 percent from 3 percent. Gross domestic product grew 2.8 percent in the third quarter after shrinking for each of the previous four quarters.But we still have a ways to go:
"There is more of a self-sustaining dynamic developing," Julia Coronado, senior U.S. economist at BNP Paribas SA in New York, said before the announcement. "We are still in a very deep hole."The more newsy part of the Fed's announcement centered on the unusual liquidity measures brought to the financial markets this year, that is, stepping in to buy hundreds of billions worth of commercial paper, and lend in similarly large quantities to bond dealers, to take the place of the usual players who are still timid, or defunct. (These are the less well-known, and hard to acronymize, programs of CPFF, PDCF, TSLF, and ABCPMMMF.)
In the Financial Times yesterday, Krishna Guha pulled back the curtain before the meeting, saying the Fed would withdraw the lending props, but would have to make the specific steps on liquidity clear, so the markets wouldn't think the Fed was backing away from low rates the economy still needs:
As the crisis ebbs, the Fed is borrowing a page from the European Central Bank, which draws a sharp distinction between monetary policy and liquidity policy, through a so-called "separation principle". Senior Fed officials thought this distinction problematic mid-crisis but believe it has some relevance to the exit process. With financial markets once again buoyant but the economy still burdened with high unemployment, normalisation of liquidity policy and monetary policy can proceed at different paces.The insightful Mr. Gupta also predicts that Fed governors will remain a unified force, and not call for steps of different potencies until the economy is rolling again:
Fed hawks and doves are observing a truce, positioning themselves for a fight to come, possibly in mid-2010. With unemployment at 10 per cent, and Congress reviewing the Fed, there is no point in hawks pressing a fight now.