The US Federal Reserve has moved to make sure the markets fully understand that there will be no change in American monetary policy.
There’s been a rising tide of disquiet about a possible change in policy, signalled by the wording in the post-meeting statement which was made just after 6.15 am, Sydney time, today.
Specifically this sentence:
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
That’s considered to be the key statement on the current monetary policy stance.
In fact the Fed not only maintained the existing wording, but extended it to make very clear there was no reason why anyone should think rates should rise.
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
So if anyone thinks that a blip up in production, a jump in sales, or a rise in inflation in a month or three, will produce a rise in rates, then they should take a bex, have a lie down and re-read this sentence.
No danger from inflation and the still large output gap (plus high unemployment) means no need for a rate rise for "an extended period of time".
Some hawks in the commintariat claim this means the Fed has ‘fiddled with the statement’ as they said it would and given a clear list of factors that would influence a rate rise.
But inflation trends and expectations have always driven Fed rate decisions: every statement mentions them when rate rises have changed.
It’s the mention of "low rates of resource uiltization’ that is new in this context and the more important factor; which means it is the one to watch. So industrial production capacity utilisation, factory orders, inventories and above all, unemployment, will all bear watching.
As the World Bank remarked yesterday in a report on China and much of Asia’s prospects, ‘the rebound has yet become a recovery’, despite some claiming to see signs to the contrary.
US car sales improved last month, joining those in Japan, South Korea and parts of Europe, thanks mostly to the tax and other support from government stimulus spending.
In America’s case there seems to have been some market growth, although many of the sales represent vehicles being delivered under the cash for clunkers scheme.
US car sales hit an annual rate of a touch under 10.5 million units a year, a rate not seen for a year except in the clash for clunker boom months of July and August.
US factory orders rose a stronger-than-expected 0.9% in September, and inventories continued to shrink, improving prospects for a sustained economic recovery.
It was the fifth month out of the past six American manufacturers saw orders rise.
However Reuters reported that because the factory orders report showed a sharper cut in inventories than the Commerce Department had reported last week, analysts said it could mean third quarter growth was weaker than the first reading of a 3.5% annual rate, implied.
The Commerce Department said last week that a slowdown in the rate at which businesses were liquidating inventories in the second quarter added nearly a percentage point to the increase in US gross domestic product.
Reuters said that based on Tuesday’s factory data, JPMorgan Securities Global Economic Research said it cut its estimate for third-quarter growth to 3.1%.
But Asian economies are doing better than expected, and Europe is now expecting stronger growth in 2010 (0.7%, instead of a slight contraction), according to the latest forecasts from the European Commission.
But this won’t be enough to force the European Central Bank to change rate policy tonight, our time, nor the Bank of England, which also meets around the same time.
The US economy has struggled out of recession and there’s been a continuing flow of good data from manufacturing and the service sector: but consumer spending remains very weak and that, along with the weakened banking system, are the main drags on the economy getting stronger faster.
Housing is doing well, but judgment should be withheld until we see a couple of months without any support from home buying tax breaks. It could be a very different story.
Governments in China, Europe, and even Australia would agree given that the US financial markets remain the key to global confidence.
A senior Fed official Jon Greenlee, associate director of the Fed’s Division of Banking Supervision and Regulation, warned this week that America’s banks face the rising risk of sizeable new loan losses, particularly on commercial property, and some banks may not have enough capital to fully protect themselves against losses.
As most of the 116 banks to have failed in the US this year have been taken down by unsustainable losses on commercial or home mortgage lending, his comments, have a loud ring of certainty.
"Credit losses at banking organizations continued to rise, and banks face risks of sizable additional credit losses given the outlook for production and employment," he said in his opening remarks to a Congressional Committee.
