Tweaking And Treating

The Fed did not change its policy... or maybe it did, as it altered its communication, with emphasizing the threat from low inflation and not adding to the statement the guidance about QE3. We'll have to wait until December for tapering to be announced.

With no press brief scheduled, the Fed did not alter its monetary policy: interest rates remain at the zero lower bound and QE3 keeps going at the same pace (USD85bn a month of MBS and Treasury purchases.

But the FOMC ended up providing a statement that was way more dovish than most expected. First, a sentence about the possible threat of too low an inflation rate was added: "The Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance.

This answers the call that James Bullard, from St Louis Fed, had made during the previous meeting (he believed "that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings") and led him not to dissent the decision this time.

More strikingly, the guidance (about QE3) provided six weeks ago by Chairman Bernanke during his press brief was not added to the statement. Following the June meeting, Mr Bernanke had declared that, should the economic situation develop accordingly with FOMC members' forecasts, the Fed would slow the pace of monthly security purchases later this year, ending QE3 altogether by the middle of next year, when the unemployment rate would be in the vicinity of 7%.

The reason behind it is not that FOMC members are getting more worried about economic conditions. As it was the case last time, the statement notes that "The Committee sees the downside risks to the outlook for the economy and the labour market as having diminished since the fall”.

BY Alexandra ESTIOT

To Read the Entire Report Please Click on the pdf File Below.