Thursday, November 3, 2011

Fed Watch

It seems that the Federal Reserve has officially recognized what seems clear to everyone watching economic developments. The recovery is slower than expected and it will take some time for us to return to healthy economic growth and more acceptable unemployment.

The Fed has revised downward its projections for GDP growth and unemployment
In fresh quarterly projections, the Fed lowered forecasts for growth and raised forecasts for unemployment for this year, 2012 and 2013. Policymakers do not see the jobless rate, now at 9.1 percent, falling to a level they consider consistent with full employment even by the outer edge of their forecasting horizon, the final quarter of 2014.
Officials now expect the economy to grow by 2.5 percent to 2.9 percent next year, down from 3.3 percent to 3.7 percent they were expecting in June, with inflation muted over the forecast horizon.
They see the unemployment rate going no lower than 8.5 percent to 8.7 percent by the end of 2012, up from the 7.8 percent to 8.2 percent range envisioned in June.
In response to this negative forecast, the Fed plans to continue its relatively easy money policy.
At its meeting ending November 2, the Federal Reserve the Committee decided to continue its program to extend the average maturity of its holdings of securities as announced in September. This is the Operation Twist where the Fed replaces short term securities in its portfolio with longer teem securities. The purpose is to continue the downward pressure on long term interest rates, including mortgage rates.

Sort term rate policy is unchanged as well, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent.

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