Thursday, 26 January 2012

Bernanke expands ZIRP till mid 2014

During the yesterday's Federal Open Market Committee meeting, FED's chairman Ben Bernanke adjusted downwards the US growth outlook and extended the Zero Interest Rate Policy until mid 2014. He didn't mention any further large scale asset purchases except  "Operation Twist" and rolling over of the current portfolio and he didn't mention any unemployment targeting (a widely expected figure).

With his finger on the trigger

Chairman Bernanke knows that the previous QEs have expanded the balance sheets of the major financial institutions (which incidentally decided to hoard the cash, either in deposits at FED, or in short term Treasuries, or T-bills), but has had little or no effect on the overall state of the economy. He also mentioned that FED is "prepared to provide further monetary accommodation" in case of "high and persistent unemployment in an under-performing economy". The inflation rate was targeted at 2%. From the FOMC statement: 

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

FED projections
FOMC downgraded the growth estimates from the previous 2012 figure of 2.5-2.9% to 2.2-2.7%.

According to these projections, the unemployment rate will stay high till 2014, with the central tendency (the blue area) between 6.8% and 7.6%.

FED is forecasting the core inflation (which does not take into account the effects of food and energy prices due to their volatility), of 2% in the long run, and no significant upward shocks. This is a bold prediction, considering the massive expansion of its balance sheet, as a result of numerous round of printing.

While the chairman's view (the most influential one) is not expressed in this chart, it seems highly probable that the firming of US monetary policy will not take place before 2014. There are 6 FOMC members that voted for a policy tightening after 2015.


This FOMC meeting did not announce the much expected round 3 of Quantitative Easing, but it did lay groundwork for more large scale asset purchases in case the economic growth and unemployment rate disappoint.

 Projections are from FOMC 25 January release.

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