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US: FOMC to Hold the Line
• We do not expect any change in tone at the
January FOMC meeting.
• While the January voter rotation brings in a
hawkish group, there seems to be solidarity in
the near term.
• The more difficult debates will arise as QE2
nears completion and the Fed has still made
little progress on its mandates.
The FOMC will next week set its economic
forecasts for the monetary policy report to
Congress. It is likely to choose a cautious
interpretation of recent economic strength
The Fed meets next week to evaluate the economic
outlook and stance of monetary policy. The meeting
will last two days as the Committee is also setting its
quarterly forecasts ahead of the monetary policy
testimony before Congress in mid-February.
Not much has changed on the economic front since
the mid-December meeting. Data have continued to
confirm that Q4 is shaping up to be a strong quarter
for final demand growth, yet labour market indicators
have shown little benefits from stronger spending
with steady but lacklustre job creation.
Headline inflation has surged while core inflation and
wage growth remain under pressure. The equity
market continued to rally while house prices have
steadily fallen and interest rates remained above
those that prevailed for most of the year prior to the
November FOMC meeting.
At the December policy meeting, the FOMC chose a
cautious interpretation of the Q4 strength and that
seems likely to continue. Indeed, Chairman
Bernanke reiterated that cautious stance at his
Congressional testimony after the December
employment report. He said “Although recent
indicators of spending and production have generally
been encouraging, conditions in the labor market
have improved only modestly at best…overall, the
pace of economic recovery seems likely to be
moderately stronger in 2011 than it was in 2010.”
Most Fed speakers have publicly supported the
completion of QE2 and we expect little change to the
tone of the policy statement released next
Wednesday.
A hawkish rotation of voters may actually bring
increased near-term solidarity
Every January brings a rotation of FOMC voters. All
Governors at the Federal Reserve Board are
permanent voting members, as is the President of
the New York Fed. However, four of the 12 regional
bank presidents serve rotating one-year terms as
voters. Rotating out as voters are Cleveland Fed
President Pianalto, Boston Fed President
Rosengren, St. Louis Fed President Bullard and
Kansas City Fed President Hoenig.
Presidents Pianalto and Rosengren are fairly dovish
and stood solidly behind the Fed’s QE policies.
Dudley V Lockhart Bernanke V Bullard Fisher V Hoenig
(New York) (Atlanta) (Chairman) (St. Louis) (Dallas) (Kansas)
Evans V Yellen V Duke V Warsh V Kocherlakota V Lacker
(Chicago) (Vice Chair) (Governor) (Governor) (Minneapolis) (Richmond)
Raskin V Tarullo V Plosser V
(Governor) (Governor) (Philadelphia)
Rosengren V
(Boston)
Pianalto
(Cleveland)
1 2 3 4 5 6 7 8 9 10
Dove
Inflation forecast informed mainly by Phillips Curve
View high unemployment as mainly cyclical
and therefore can be helped with policy
Hawk
Inflation forecast informed by monetary policy stance
View high unemployment as mainly structural
and therefore immune to policy
Notes: “V” indicates the FOMC member is a voter in 2011. All FOMC participants without a regional affiliation are members of the Federal Reserve Board, all of whom are voters. There are currently two
vacancies on the Board. Participants’ views can and do change over time.
Julia Coronado 20 January 2011
Market Mover
10
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