NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
215-497-9050

March 16, 2010 FOMC Decision

“…inflation is likely to be subdued for some time.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%
 
The members of the Federal Reserve came to Washington, said hello, ate their lunch and by keeping rates at the current extraordinarily low level did absolutely nothing to surprise the markets.  Indeed, it took an extremely careful parsing of the statement to find any changes in the wording.  In its description of the labor market, instead of the comment made on January 27th that “the deterioration in the labor market is abating” they now say “the labor market is stabilizing”.  That change simply reflects the reality of the market.  They didn’t alter their view that moderate consumer spending is still being constrained by the headwinds of “high unemployment, modest income growth, lower housing wealth, and tight credit”.  There was an additional comment that housing starts are not going anywhere.  That’s about it on the economy.  That is, the changes simply reflect the modest improvement in conditions since the last meeting.  
 
The FOMC also indicated that the winding down its support of the housing credit market and the end of that intervention is likely to mean somewhat higher mortgage rates.  The Committee made it clear that they are ready to re-intervene if necessary.
 
So what should we make of the FOMC’s actions?  Basically, the members believe that inflation is not an issue.  They continued to set apart their view on inflation from all the other comments.  As long as they feel there is no threat that inflation will start accelerating sharply, the famous phrase, “exceptionally low levels of the federal funds rate for an extended period” will be retained.  But any reason to think that the economy has reached the stage where growth is sustainable at a decent pace will change that thinking and lead to an increase in rates.  That is not going to happen, though, for an extended period.  

FROM: CHRISTOPHER J. BROWN, PRESIDENT

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