Goldman Sachs: No Action But ready To Move
1. The Federal Open Market Committee announced no new policy measures today and made only a few small—but important—changes to its policy statement. In particular, guidance that “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014” was unchanged, and no new asset purchase or other programs were announced. Once again, Richmond Fed President Lacker dissented, this time in objection to providing a specific time period for the interest rate guidance.
2. The statement did reflect the generally weak tone of economic data since the previous meeting in late June. First, it noted that “activity decelerated somewhat over the first half of this year” (the previous wording was “the economy has been expanding moderately”). Second, employment growth was described as “slow”. Third, the statement more clearly acknowledged a soft pace of spending growth (the previous statement was framed tentatively, suggesting spending “appears” to be growing more slowly).
3. Most importantly, the final sentence of the statement suggested a strengthening of the committee’s “easing bias”. Whereas before the statement indicated the FOMC’s willingness to “take further action as appropriate to promote a stronger economic recovery”, the sentence now reads “The Committee will closely monitor incoming information…and will provide additional accommodation as needed to promote a stronger economic recovery”.
4. Our interpretation of the forward-looking language in today’s statement – especially the phrase “will provide additional accommodation as needed” – is that some form of monetary easing at the September 12-13 FOMC meeting is the current baseline. Although easing is by no means a foregone conclusion, we suspect that the incoming information needs to improve materially in order to forestall it. Under our own forecast of a only a slight improvement in output and employment growth, we believe a small easing step – most plausibly a lengthening of the forward rate guidance – is the most likely outcome for September 13, with asset purchases financed by renewed balance sheet expansion following in late 2012/early 2013.