FOMC’s August 12 Monetary Policy Statement: No Rate Change, but Somewhat More Upbeat

On Wednesday, August 12, the Federal Reserve’s Federal Open Market Committee (FOMC) will very likely hold the federal funds rate steady in the 0.00% to 0.25% range. Signaling continuity with current interest rate policy, Federal Reserve Chairman Ben Bernanke told the House of Representatives’ Committee on Financial Services on July 21, “The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.”

Nevertheless, the FOMC’s forthcoming policy statement will likely reflect a combination of sentiments that are similar to recent monetary policy statements, along with some subtle changes in wording to reflect the continuing stabilization of the U.S. economy and prospects for modest growth through the rest of 2009. Overall, the statement will be somewhat more upbeat than the prior one, but it is unlikely to contain any hints of upcoming interest rate hikes or concerns about rising inflation.

Overall, one can likely expect the following in the FOMC’s forthcoming monetary policy statement:

• That the pace of economic contraction has slowed significantly and that economic activity is showing some indications of stabilizing. It may also note some enhancement in economic prospects. That wording will constitute an improvement over the FOMC’s June 24 statement in which it observed that “the pace of economic contraction is slowing.”

• That the housing market has shown additional signs of stabilizing.

• Household spending has remained fairly stable, but is constrained by continuing weakness in the labor market.

• Anticipation that “policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

• Modest growth in economic activity is likely during the remainder of the year.

• That inflation will remain “subdued.”

• The FOMC “will employ all available tools to promote economic recovery and to preserve price stability,” “will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets,” and that it will monitor “the size and composition of its balance sheet” and make such adjustments as might be warranted.

• Economic conditions will “likely warrant exceptionally low levels of the federal funds rate for an extended period.”

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