The FOMC meeting ended with no policy changes and a cautious statement, despite brighter macroeconomic forecasts for 2012. The Fed signals that risks from global financial markets are again on the rise and remain “significant”. Policy guidelines were as expected: the forecast of stable rates “at least until late 2014” was confirmed, as was the “entire” commitment “to do more” if necessary. There were no indications or specific references to new monetary stimulus programmes. As before, Lacker dissented on the guideline of unchanged rates until 2014…..
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Bernanke went into greater detail on the assessment of the labour market: the recent improvement could be the result of a “one-off” adjustment after the huge corrections caused by the recession; also, it is still possible that, as GDP grows, the participation rate may start rising. Interrupting downward trend of the unemployment rate. Bernanke also noted that mild weather conditions at the start of the year may have artificially improved economic data in several sectors.
As regards the monetary policy strategy, Bernanke said that the end of the maturity extension program should have only “moderate” effects on yields, as the market reacts to the stock of securities rather that to flows. No explicit reference was made to new programmes, even though it was repeated that the Fed is ready to do more if necessary. Clearly, monetary policy will be guided over the next few quarters by macroeconomic data: a weakening of growth and/or of the employment trend could trigger new interventions. Our forecast for weakness in the months ahead could increase the chances of a new purchase programme. An extension of the “Operation Twist” is unlikely, as the share of short term securities in the Fed’s balance sheet has dropped significantly.
As expected, the BoJ meeting ended with new stimulus, along two dimensions. 1) The total size of the purchase programme was raised by 5 trillion yen, to 70 trillion, and will end in June 2013 (previous expiration: end of 2012). 2) The composition of the programme was changed, with reduced emphasis on credit easing (loans -5 trillion yen) as opposed to increased purchases (+10 trillion yen to 29 trillion, ETF + 200 billion, J-REIT +10 billion). JGB purchases will be on the 1-3 year maturity segment, as opposed to the current 1-2 years. The central bank confirmed that it will continue to implement “powerful” monetary easing to achieve its medium-long term inflation target of 1%. The main effect of the BoJ’s actions is the signal that, with growing amounts of available liquidity, the exchange rate will remain on the current depreciation path, supporting demand through exports and contributing to reduce deflationary pressures.
Appendix
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