Goldman's Take: "Fed Returns To Monetary Easing"

Tyler Durden's picture

Goldman demanded it, Goldman ordered it, Goldman got it.

Fed Returns to Monetary Easing

BOTTOM LINE: Despite three dissents--the largest number since 1992--the committee adopted an even easier policy stance than expected: first, the committee now anticipates that rates will stay on hold "at least through mid-2013." Second, the committee effectively signaled an easing bias saying that it is prepared to employ additional easing steps as appropriate.

MAIN POINTS:

1. As expected, the statement included a significant downgrade of the economic outlook. The committee views growth as having been "considerably slower" than expected, highlighting "deterioration in overall labor market conditions," "flattened out" household spending and that the supply chain disruptions can "account for only some of the recent weakness in economic activity."The committee furthermore stresses that "downside risks to the economic outlook have increased."

2. The committee adopted an even easier policy stance than expected. First, the committee now anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate "at least through mid-2013" instead of "for an extended period." Although some form of strengthening of the guidance language was expected and the new guidance remains conditional on the economic outlook, we see this step as a dovish surprise. Three members--Fisher, Kocherlakota and Plosser--dissented from this decision, the largest number of dissents since November 1992.

3. Moreover, the committee effectively signaled an easing bias saying that it discussed "the range of policy tools necessary to promote a stronger economic recovery" and that it "is prepared to employ these tools as appropriate." In our view, this leaves open the possibility of further asset purchases ("QE3") should the economic outlook deteriorate further from here.