No News Is Good News

Nothing changed at the Fed. No rate hike. No tapering. Forecasts are just somewhat different from the previous release (slightly less growth). The Fed is worried by the lack of progress on the labour market and the tightening of financial conditions. On the other hand, the risks on QE3 are no more balanced: if a slowdown in purchases is discussed at length, the possibility of an acceleration disappeared from the statement…

Pas de changement à la Fed : pas de hausse de taux, pas de ralentissement de QE3. Les prévisions sont marginalement révisées (notamment avec une croissance un peu moins dynamique). La Fed s’inquiète du peu de dynamisme de l’emploi et du resserrement des conditions financières. Mais il semble bien que QE3 n’a plus qu’une direction possible : la possibilité d’augmenter le rythme mensuel d’achats a disparu du communiqué de presse.

■ Fed members decided to leave monetary policy essentially unchanged. The Fed Fund Target remains in the 0.00%-0.25% range it has been since the end of 2008, and the Fed will keep on purchasing USD 85 bn a month of securities as part of the third wave of quantitative easing (QE3).

■ The statement was neither very different than the one released following the previous FOMC meeting, on July 30th-31st, stating that “economic activity expanded at a modest pace during the first half of the year”. However, while labour conditions were previously judged as further improving, the diagnosis was downgraded by a notch, with the addition of just three meaningful words: “on balance”. Admittedly, while non-farm job creations were on a trend of 196,000 (smoothed over three months) when the FOMC last gathered, it is now estimated at only 148,000. This pace is insufficient to absorb new entrants on the labour market and the unemployment rate is declining only because the labour participation rate is falling.

■ On top of the stalling recovery of the labour market, comes the rise in interest rates in response to evocation of tapering in late spring. Over a very short period of time, long-term interest rates tightened by 100 basis points, which is likely to slow down credit growth. This development is noted in the statement, as mortgage rates are said to have “risen further”, while later it is said that “tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market”.

■ The latest data covering the residential market seem to indicate a slowdown. For instance, new home authorised, which were running at double-digit rate (year-on-year) until the second quarter of 2013, slowed to 11% in August. The development is rather similar for new home starts. As of July, existing home sales remained dynamic, but new home sales were running far less quickly than previously.

■ As for now, consumer spending on durable goods remains reliant, but the slowdown in real disposable income coupled with the rise in interest rates is likely to take a bite on those spending sooner or later.

BY Alexandra ESTIOT

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