The US Federal Reserve was faced with difficult choice overnight, how to sound concerned, but not too worried about an American economy which is showing more and more signs of life.
And, that’s what they did, sitting on rates as expected and agreeing to continue the current securities buying program designed to push down longer term interest rates.
Markets fell in the US after the Fed statement. That was after falls in Europe (except for London) and in Asia where Shanghai hit another near three year low yesterday.
More worrying though was another sharp fall in the value of the euro as last week’s split agreement in the EU continued to cause ructions.
The euro traded down to just above $US1.30, about where it was at the start of this year. The strength in the greenback pushed the Aussie dollar down to just above parity at around $US1.005.
And gold was sold off, again, losing 2% or $US34 to end at $US1634 an ounce, another 7 week low.
The Fed’s Open Markets Committee met for the last time overnight in a year which proved to be replay of 2010: strong at the start, weak in the middle (to the point of new recession fears) and then a strengthening surge later.
In leaving the Federal Funds rate, at an historic low range of 0% to 0.25%, the Fed noted that the US "economy has been expanding moderately, notwithstanding some apparent slowing in global growth."
"While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.
"Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed.
"Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable."
"The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually," The statement read.
The only downside risk mentioned in the statement was the growing global slowdown especially the strains coming from the euroland crisis..
"Strains in global financial markets continue to pose significant downside risks to the economic outlook."
This month is the third anniversary of rates near zero, a sign of just how weak the economy remains, despite those second or third blushes of recovery.
The Fed to maintained its guidance that it intends to keep rates at the current level until mid-2013.
With 2012 a highly political year and no sign of any resolution of the spending and debt conundrum that saw Standard & Poor’s cut America’s AAA credit rating in August, the Fed will play it safe for another year.
Right now there’s the political brawl over extending the payroll tax cut and unemployment insurance past the end of this month: President Obama wants to do it, the Republicans are resisting saying they want spending cuts to pay for the extensions, oblivious to the fact or the misery and the problems ending them will cause.
Ending both will involve a sharp cut in Federal spending and add further the expected fiscal drag the US economy will have to deal with in 2012.
Extending the tax cut will cost a minimum of $US120 billion next year, extending the unemployment benefits will cost tens of billions of dollars as well, even if employment keeps growing as it has done in the last four months.
Extending the unemployment benefits will cost a minimum of $US44 billion for all of next year and affect 5 million unemployed people, according to estimates from the US Government.
That’s lower than the previous extension for 2011 which will cost around $US57 million and impact 7 million unemployed people.
Fed officials have been pondering whether to adopt an explicit inflation target, which would be similar to Australia.
The statement today offered no new guidance on its evolving communications policy.
The Fed repeated that it expects inflation to settle at levels at or below those consistent with its price stability mandate.
Some economists think the Fed will wait until its January 24-25 meeting to make an announcement on changes to its post meeting statement and other policy communications.
And if the Fed waits, the minutes of this morning’s meeting, to be released on January 3, will provide crucial clues of planned changes, especially about growth, unemployment and interest rate forecasts.
