Wednesday, January 25, 2012

The Fed Speaks

The Lehmann Letter (SM)

Today the Federal Reserve released its latest statement from the Federal Open Market Committee (FOMC). This is the Fed’s key policy-setting body.

The FOMC said:

“… the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates 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 at least through late 2014 ….”

There you have it: Sluggish growth, high unemployment, negligible inflation.

The Fed will maintain low interest rates for the foreseeable future. But, as the January 2 edition of this letter said, the Fed’s control over interest rates is like the reins on a horse. Pulling back has been more effective than letting go. Right now the horse is exhausted, and those dangling reins aren’t motivating him to run.

(To be fully informed visit

© 2012 Michael B. Lehmann

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