ABA Banking Journal - January 2013 - (Page 8)

the economy BY SCOTT J. BROWN Understanding Fed speak Targets, thresholds, guideposts, and goals are all in play The Federal Open Market Committee’s (FOMC) announcement last Dec 12, 2012 month had two components: asset $2.9 Trillion purchases and forward guidance on $3.0 the federal funds rate. The largescale asset purchase program (comLiquidity programs monly called QE3) will be $85 billion per month in 2013 and remains $2.0 MBS & open ended. FOMC said: “If the agency outlook for the labor market does debt not improve substantially, the Com$1.0 mittee will continue its purchases of Treasury and agency mortgagebacked securities, and employ its Treasuries other policy tools as appropriate, $0.0 until such improvement is achieved 2008 2009 2010 2011 2012 in a context of price stability.” This Source: Federal Reserve guidance is qualitative; it depends on a general sense of the labor market, not a specific number. The Fed will look at ply an extension of what the Fed various labor-market indicators and keep an eye on the inflation outlook. decided in September. However, the Previously, the Fed stated a date through which conditions were expected expected date of policy tightening to warrant exceptionally low levels of the overnight lending rate based on will depend on how the economy expected economic conditions. When the economic outlook changed, the evolves. Faster job growth would date changed. Now, the Fed will simply list the economic thresholds. Specifipull that date forward. Weaker ecocally, the Fed indicated that it “currently anticipates that this exceptionally nomic conditions would push the low range for the federal funds rate will be appropriate at least as long as date out; long-term interest rates the unemployment rate remains above 6.5%; inflation between one and two would fall accordingly, helping to years ahead is projected to be no more than a half percentage point above stimulate growth. Thus, the threshthe [FOMC’s] 2% longer-run goal; and longer-term inflation expectations old guidance should act as an autocontinue to be well anchored.” The unemployment and inflation thresholds matic stabilizer for the economy. are quantitative—that is, numeric. The 6.5% unemployment rate is a threshIn his recent press briefing, old, not a target, for when the Fed may start raising the overnight lending Chairman Ben S. Bernanke said rate. It is a guidepost for policy, not a goal. that “by tying future monetary The unemployment goal (“full employment”) is currently seen in the policy more explicitly to economic 5.2% to 6.0% range. The Fed does not expect the unemployment rate to fall conditions, this formulation of our below 6.5% until 2015. The 2.5% inflation threshold may be interpreted as a policy guidance should make monshort-term tolerance for higher inflation, not a target. Note that this threshetary policy more transparent and old is based on the outlook for inflation one-to-two years out. The Fed is not predictable to the public.” n going to react to current inflation. In their projections, Fed officials generally expect inflation to remain at or below the 2.0% target for the next few years. Scott J. Brown is senior viceAs it is, the economic thresholds are currently equivalent to the recent president and chief economist, date guidance (“mid-2015”), and the change in asset purchases is simRaymond James & Associates, Inc. $ Trillion Fed’s balance sheet growth 8  |  ABA BANKING JOURNAL  |  january 2013

Table of Contents for the Digital Edition of ABA Banking Journal - January 2013

ABA Banking Journal - January 2013
Contents
Chairman’s View
Editor’s Column
The Economy
Bank Notes
Picture This
ABA COMMUNITY BANKING Time to prune that branch?
Pass the Aspirin
Tech Topics
COVER STORY: The road ahead How banking may fare in Washington
Insurance: How well are you covered?
Compliance Special Report
Compliance Inbox
ABA At Your Service
Convention Preview
First Person

ABA Banking Journal - January 2013

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