Federal Reserve makes cautious growth upgrade

The Federal Reserve made a cautious upgrade to its growth outlook and kept its asset purchase programme at $600bn after its first unanimous vote since 2009.

The most important change to its statement was a reference to rising commodity prices. “Although commodity prices have risen, longer-term inflation expectations have remained stable, and measure of underlying inflation have been trending downward,” said the rate-setting federal open market committee at the end of a two-day meeting on Wednesday.

That suggests the Fed wants to acknowledge rising inflationary pressures at the global level while suggesting that they are unlikely to feed through into sustained US price rises that would require an early tightening of monetary policy.

“I don’t think they’re worried about commodity prices leading to across-the-board inflation,” said Michael Dueker, chief economist of Russell Investments. The FOMC said that growth was continuing but not fast enough for “a significant improvement” in labour market conditions.

“Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit,” the committee said.

The lack of a stronger upgrade to the growth language suggests that the Fed will complete its second $600bn programme of quantitative easing, which began in November and will end in June, and that it has not yet ruled out doing more after that.

“Policy remains on auto-pilot with no significant chance of an increase or decrease in asset purchases over the next few meetings,” said Jim O’Sullivan, chief economist at MF Global in New York. Ten-year bond yields initially fell after the FOMC decision but then rose to 3.42 per cent, while the Dow Jones industrial average traded above 12,000.

The committee voted by 11 to none to make no change to its policy. It is the first meeting since four new regional reserve bank presidents rotated onto the FOMC at the start of 2011. During 2010 Thomas Hoenig, president of the Kansas City Fed, dissented at every meeting but has now been rotated off the committee. Although two of the new voting members hold hawkish views – Charles Plosser of Philadelphia and Richard Fisher of Dallas – neither of them chose to dissent at this meeting.

There was a final change to the statement that intrigued markets: the Fed dropped language saying that it intends to buy assets at a pace of $75bn per month.

However, that may simply reflect the reality that the pace of Fed purchases has fluctuated from month to month.

Market optimism was fuelled by an unexpected 17.5 per cent jump in the sales of new home from November to December announced before the Fed decision.

But Capital Economics, the consultancy, noted that December’s surge was concentrated in the west of the US and argued that it “was mainly due to the rush to beat the deadline of a tax credit in ­California”.

“The housing sector continues to be depressed,” said the FOMC.