JULY FOMC MEET - A NON EVENT, UNCERTAINTY CONTINUES!

By Ruma Dubey

The much awaited, the much hyped Federal Open Market Committee (FOMC) policy statement was like a bottle of soda left open too long – no fizz, gone flat.

It was a non-event, no firework announcements on QE easing as expected. In fact there had been more action on the Indian bourses – it was an action packed day with the Commerce Minister doing his bit, the finance minister giving us his one year ‘report card’ and tried to keep hopes intact. RBI also stepped in with some reassuring statements. But it was ultimately Ben Bernanke who provided that ‘trigger’ with his non-action!

The Federal Reserve said that it will continue with its $85 billion monthly buying of bonds; this means the QE continues, at least for now. This was very much expected – no surprises there. No one had expected the Fed to start easing the QE in this meet. But what was expected was a roadmap, as to when Bernanke would at least start the easing process. At the previous FOMC meet on 20^th June, he had said, later at the Press Conference that the Fed may "moderate" its pace of bond buying later this year and may end QE by around middle of 2014. This is what had spooked markets all around the world.

So this time around, the Fed did not talk about when he will begin the easing but at the same time, he did not talk about when he expects the economy to get better. Bernanke seemed more worried this time, especially about inflation. Reading into the ‘tone’ of the statement, it came through as more anxious. In the June policy Bernanke had said that he expected the economy to grow at a ‘moderate’ pace. But this time around he changed the word to ‘modest’. Thus raged a debate about this pace going from ‘moderate’ to ‘modest’ and that was looked by many as a downgrade.

But this led to a new thought process – the Fed might not start easing by September as Bernanke now probably feels that the US economy might continue to need support for some more time. Right now, the economic growth is running much below its target and inflation is at a much lower rate than where the Fed would like it to be.

The Fed expects the economy to pick up pace from the second half as that’s the time when seasonally, companies and people spend more, there is usually a pickup in job rates and Govt spending cuts too taper off.

A quick look at the highlights of the policy statements:

• To continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month
• Left unchanged the Fed’s commitment to hold the target interest rate near zero as long as the jobless rate remains above 6.5% and inflation does not rise above 2%.
• Inflation persistently below its 2% objective could pose risks to economic performance; anticipates that inflation will move back toward its objective over the medium term
• Remained silent about when it would start easing QE, keeping uncertainty intact to that extent
• US economy expanded at a rate of 1.7% in the second quarter, beating expectations but still exhibiting lackluster growth overall. Govt also revised down its estimate of first-quarter growth to 1.1%.
• Noted for the first time that mortgage rates, which have fueled home sales, "have risen somewhat" from record lows.

So does this mean that the moment unemployment hits 6.5%, easing of QE will begin or interest rates will be hiked? Well Bernanke had said in June itself that 6.5% is not a trigger but a threshold for interest rate tightening.

Well, the indication we have– right now there is no easing of QE but we could see some announcement to this effect when the Fed meets in October and easing will happen if the US economy continues to improve – that’s the prerequisite for easing.  One of the preconditions for the Fed's policy path is that inflation starts to move toward its 2% objective.  

This non-event meet of the Fed will be like the ‘short gun Murugan’ for the market – a quick fix to improve the despondent moods but the overall uncertainty continues to weigh.