World crisis: Will the Federal Reserve act?

Clarity in communications

Back on the home front, minutes from the November meeting of the FOMC showed the committee grappling with the issue of using communication to sharpen monetary policy.

The committee discussed specifying long-term inflation goals or "providing additional information to the public about the likely future path of the target federal funds rate," the minutes show.

In an effort to foster increased transparency in addition to clearly telegraphing future goals and expectations, the statement released following the Dec. 13 Fed meeting may be longer and contain new clues about the philosophies of FOMC members.

"Now that global financial strains are becoming more commonplace in the discussions, I think the Federal Reserve feels an increased need to explain and amplify what their mandates are and how it takes policy in with respect to its mandates," says Alan Gayle, senior investment strategist and director of asset allocation at RidgeWorth Investments in Richmond, Va.

Future MBS purchases remain a possibility

Even though the economy more resembles a car struggling to get out of a ditch than a sinking ship, that has not precluded the possibility of further stimulus in the form of security purchases down the road.

In a recent speech, Janet Yellen, vice chair of the Fed's Board of Governors, indicated the Fed is comfortable maintaining a highly accommodative stance as long as inflation remains relatively stable. If necessary, more easing could come in the form of communications explicitly delineating economic targets they would like to see before raising the federal funds rate, " or through additional purchases of longer-term financial assets," she said in the speech Nov. 29 at the Federal Reserve Bank of San Francisco.

If there were to be another round of securities purchases in the future, the Fed may try to target the home mortgage area, which it views as a significant headwind to the financial recovery.

The staff forecast for the economy will also be of interest, though the in-depth discussion will only be revealed in the minutes, released three weeks after the meeting. Even so, no great surprises are expected.

"They have already lowered their economic forecast for the rest of 2011 and 2012. I suspect that they will probably stick with those forecasts," says Gayle.

"There will probably be some discussion about the extent to which U.S. banks will be potentially exposed to the weakness in the European financial system," he says. "So far, the Fed has concluded that the risk is not meaningful. It will probably maintain the current policy and will probably take more steps to explain policy and long-term outlook."


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