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The Fed's Monetary Policy Meeting: Policy Stays on Hold

As expected, there was no change in Fed policy. QE2 will end on schedule on June 30, the Fed won't begin reversing QE1 and QE2 yet, i.e. it won't reduce the size of its balance sheet, it gave no hint at all of willingness to move on to QE3, and interest rates will remain low for an "extended period."

There were, however, some changes to note in the press release relative the previous meeting. In particular, the statement notes that "recent labor market indicators have been weaker than anticipated," but the Fed attributes this to temporary factors (as I've noted, I think that it is a mistake). Thus, although the Fed has downgraded its forecast, it is looking through the current weakness to -- cross your fingers -- better times just around the corner. Thus, the Fed sees no need for further easing at this time.

In addition, the Fed says that "Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate." Thus, while the Fed is also viewing recent price movements as temporary (I agree with this assessment), they clearly have their eye on inflation. This also works against any inclination toward further easing.

I had hoped to see more acknowledgement that the current soft patch may turn out to be something more significant than a temporary aberration in the numbers, and some hint of willingness to ease further should those worries come true. But the Fed shows no such willingness, in fact as Neil Irwin notes, the "employ its policy tools as necessary to support the economic recovery" language is gone, and the main question at this point is when the Fed might begin tightening policy by reversing QE1 and QE2 rather than when they might ease further.

[See Jill Schlesinger's reaction as well]

Update: Here's my reaction to Bernanke's press conference.

Here' the FOMC a press release:
Press Release, Release Date: June 22, 2011, For immediate release: Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
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