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The Fed Leaves Monetary Policy Unchanged

The Fed's monetary policy committee ended its two-day meeting on the future course of policy, and the committee decided, as expected, to leave the federal funds rate unchanged. In addition, the statement that "economic conditions .. are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" was not changed either.

However, although the Fed didn't do anything new, it did express some optimism that the recent weakness in the economy was due to temporary factors, and that the recovery ought to gather steam in the near future ("economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors"). However, there are still worries ahead, and the committee expressed concern over the events in Europe and about the state of the labor market. Europe in particular is a significant downside risk.

There was, however, an interesting dissent to the Fed's decision to continue the existing policy. In past meetings when the Fed has decided to pursue further easing, the hawkish members of the Fed have voted against the action. For example, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser dissented at the September 21 meeting when the Fed decided to extend the maturity of its portfolio. However, this time the dissent was from the dovish faction of the Committee. As the Press Release notes, Chicago Fed president Charles Evans voted against the current decision to leave policy unchanged because he supports "additional policy accommodation at this time." Since I agree with Evans -- I think there is more weakness in the economy than the Fed is acknowledging -- the dissent from the dovish side of the committee is a welcome departure.

With such strong disagreement on the Committee about the risks of inflation and the need to do more to help the economy, splitting the difference between the hawk and dove factions and leaving policy unchanged was one of the few feasible outcomes, but neither side will be happy with the decision.

[Later today Ben Bernanke will hold a press conference to talk about the committee's decision and monetary policy more generally, and I'll add an update once it's over. You can watch the press conference, which begins at 11:15 EST, here.]

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