Wednesday, June 24
Posted 4p.m. Eastern
The Federal Open Market Committee concluded this afternoon. Let's get the obligatory stuff out of the way first: No they didn't increase interest rates (we're light-years away from that happening) and they didn't make any changes to their buyback programs (the "let the chips fall where they may" scenario outlined in my previous post).
I see three things that stand out from this FOMC statement. First, the Fed validated the "less bad" economic scenario, saying "the pace of economic contraction is slowing." In the world of Fed Word Parsing, that is a change from "appears to be somewhat slower" following the April meeting. This is encouraging in a sense, as the free-fall economic scenario so feared just a few short months ago is now apparently behind us.
Secondly, the Fed deleted a reference to concerns about deflation and devoted an entire two sentences to inflation. Woo-hoo! That is enough to assuage bond investors, for now, but as the year progresses methinks the Fed will have to sharpen the tone even further or longer-term interest rates will resume the climb. For now, the Fed points to a lack of pricing power by businesses because of the "substantial resource slack."
And third, the Fed isn't in a position to lay out an exit strategy from the liquidity programs, but they did give a nod to the eventuality of doing so by saying they "will make adjustments to its credit and liquidity programs as warranted."
The second and third items together are aimed at bond investors, who had pushed up rates on longer-term debt -- maturities of two years and longer -- on concerns about eventual inflation resulting in part from all of the liquidity programs. Just to repeat, I believe the Fed will need to sharpen this language even further as the year progresses or rates on those same longer-term debt instruments could resume the upward climb. The Fed expects inflation to remain low for some time, but so do investors. It's two, three, four years down the road that has investors concerned and the Fed will ultimately need to speak to that.