Fed Watch

At the close of its latest two-day meeting, the Federal Open Market Committee announced no policy changes to stimulate the economy.
In a statement, the committee acknowledged slowing economic activity, slow employment growth, and decelerating household spending, along with inflation “at or below” what the central bank considers an acceptable rate. However, rather than provide new stimulus, the committee promised to remain watchful.
“The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” read a statement released after the meeting.
That reassurance serves as “a gentle reminder that the Fed isn’t taking the summer off. They’re still monitoring the situation,” says Doug Roberts, chief investment strategist at Channel Capital Research.
Aside from providing gentle reminders, the Fed is also maintaining other key policies: the committee reiterated that interest rates are likely to remain “exceptionally low” through late 2014 and also said it would continue its “Operation Twist” through the end of the year.
It does, however, mean another month and a half of anticipation to see if the Fed will undertake another round of massive asset purchases known as “quantitative easing.”
That program involves buying securities from banks in an effort to boost lending and provide monetary stimulus to a flagging economy. With recent slowdowns in GDP, job creation, and consumer spending, not to mention a Congress deadlocked over resolving long-standing fiscal issues, a third round of easing, known as “QE3,” has seemed increasingly likely.
The question now is if—and when—QE3 will be happening.
The expectation for that stimulus now shifts to the Fed’s September meeting. At that point, the committee will have two more months of employment data to guide their moves, and the added benefit of a post-meeting press conference allowing Federal Reserve Chairman Ben Bernanke to explain any new moves.
Of course, alongside the persistent debate of when QE3 might happen is the question whether it will work as intended. Though it might push markets and asset prices higher and mortgage rates lower, it may not be as stimulative as one might hope, says David Shulman, senior economist at UCLA’s Anderson Forecast.
“The markets want it, the markets will probably rally a little bit on it, but then I don’t think it will have any oomph,” says. “That’s my personal view. I don’t think it will do a whole lot. … The system is totally flooded with liquidity.”
By way of example, Shulman points to mortgage rates, which are already near record lows. Pushing them down still further may do little good, he says, as large down payment requirements are prohibiting many potential buyers from getting into the housing market