logo
  Join        Login             Stock Quote

Fed To Continue Stimulus Amid Unstable Inflation Forecasts

 December 13, 2012 10:12 AM


(BY Mani) Expectations for continued easy policy were confirmed as it announced additional Treasury purchases, and guidelines for policy are now defined in terms of unemployment and inflation rather than time. However, the latest move comes at a time when inflation expectations are not stable.

As expected, the Federal Open Market Committee (FOMC) decided to continue with the current easing program. With its supply of short-term securities running low, the Fed will now simply buy long-term Treasury securities of about $45 billion per month. This should increase the Fed's balance sheet and thereby supply greater liquidity to capital markets.

The Committee's outlook for real GDP growth in 2013 is 2.3-3.0 percent, which is slightly more pessimistic than the September forecast.

[Related -Tripadvisor Inc. (TRIP) Q2 Earnings Preview: On Target Enough?]

"To us, it appears that the FOMC's expectations do not include a significant hit to consumer spending in 2013 from the expiration of the payroll tax and extended unemployment benefits, nor to business spending due to the end of bonus depreciation, which are essential elements of our forecast," Wells Fargo economist John Silvia wrote in a note to clients.

There is also the risk of a weak compromise on the fiscal cliff that does little to alter the long-term budget issues.

The Committee specified its interest rate guidance, with the target rate to remain exceptionally low "at least as long as the unemployment rate remains above 6.5 percent [and] inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2 percent goal."

[Related -Facebook Inc. (FB) Q2 Earnings Preview: Scoring Big on the World Cup]

"The moderate pace of growth that we expect would be consistent with only a modest decline in the unemployment rate, and this is consistent with the FOMC's projections of the jobless rates of 7.4-7.7 percent by the end of 2013," Silvia said.

Meanwhile, the longer-run unemployment rate range was unchanged at 5.2-6.0 percent.

Over the past two years, the decline in the unemployment rate has reflected an improved job market but also the impact of changing demographics and some disincentives to work/hire due to tax and regulatory changes that have developed in recent years. Therefore, due to structural change, it is difficult to see to what extent policy has positively influenced job gains.

As evidenced by the gradual rise in the 5-year, and 5-year forward TIPS (Treasury Inflation-Protected Securities), inflation expectations measure, long-term inflation expectations have risen and have not been stable as asserted in the FOMC statement.

With 5-year inflation expectations at 2.06 percent, the real yields on savings and Treasury instruments with maturity below five years are negative. For some time, the pricing of Treasury instruments has been skewed by foreign government purchases while the Fed has been increasing its balance sheet.

"These buyers are not mark-to-market buyers, and therefore, it becomes increasingly difficult for private actors to price non-Treasury financial assets since the risk-free benchmark rate is not reflective of traditional free-market forces," Silvia added.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageChipotle Mexican Grill, Inc. (CMG) Q2 Earnings Preview: Will Higher Traffic Offset Higher Costs the Key

Chipotle Mexican Grill, Inc. (NYSE:CMG) will host a conference call to discuss second quarter 2014 read on...

article imageNetflix, Inc. (NFLX) Q2 Earnings Preview: The Ruby Month for a Reason

Netflix, Inc. (NASDAQ:NFLX) will post its second-quarter 2014 financial results and business outlook on its read on...

article imageLadenburg Thalmann Financial Services (NYSEMKT:LTS): Heavy, Durable Insider Buying

Ahh, but any worries over price levels didn’t stop multiple insiders at Ladenburg Thalmann Financial read on...

article imageInternational Business Machines Corp. (IBM) Q2 Earnings Preview: Small Beat and Pop

International Business Machines Corp. (NYSE:IBM) will host a conference call Wednesday, Jul. 16, 2014 at read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.