by Calculated Risk on 1/25/2012 04:30:00 PM

A few quick thoughts ...

• Fed Chairman Ben Bernanke made it clear that no decision on additional asset purchases has been made and that any additional balance sheet expansion would be a "collective" decision, however ...

• Bernanke made it clear that maximum sustainable employment and stable prices (defined as 2% inflation of personal consumption expenditures) are on "equal footing".

• The current projections are for unemployment to be significantly too high for years and inflation to be at or below the Fed's target. That is a strong argument for additional monetary accommodation.

• In the Q&A, Bernanke made it clear that even if inflation moved above the target - and unemployment was still very high - the Fed would only slowly pursue policies to reduce the inflation rate.

• The minutes for the FOMC meeting will probably contain discussion of the outlook for the balance sheet and possible further asset purchases. Those minutes will be released in 3 weeks.

Although the FOMC might still wait until one of the two day meetings in April or June, the likelihood of QE3 being announced at the March 13th meeting has increased significantly.

by Calculated Risk on 1/25/2012 02:00:00 PM

Earlier the FOMC released a statement for the January meeting.

Here are the longer run projections

The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. ... FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent.

Here are the updated forecasts from the January meeting. The key details are below the video.

Fed Chairman Ben Bernanke will hold a press briefing at 2:15 PM.




Click on graph for larger image.

"The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year."

Most participants project the first rate hike will appropriately occur in 2014 or later.

"The dots represent individual policymakers’ projections of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. Each dot in that chart represents one policymaker’s projection."

Most participants think the Fed Funds rate will be in the current range into 2014. Then there is some disagreement.

GDP projections were revised down.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2012	2013	2014
January 2012 Projections	2.2 to 2.7	2.8 to 3.2	3.3 to 4.0
November 2011 Projections	2.5 to 2.9	3.0 to 3.5	3.0 to 3.9

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

Unemployment rate projections were also revised down.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2012	2013	2014
January 2012 Projections	8.2 to 8.5	7.4 to 8.1	6.7 to 7.6
November 2011 Projections	8.5 to 8.7	7.8 to 8.2	6.8 to 7.7

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

And inflation projections were revised down.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2012	2013	2014
January 2012 Projections	1.4 to 1.8	1.4 to 2.0	1.6 to 2.0
November 2011 Projections	1.4 to 2.0	1.5 to 2.0	1.5 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2012	2013	2014
January 2012 Projections	1.5 to 1.8	1.5 to 2.0	1.6 to 2.0
November 2011 Projections	1.5 to 2.0	1.4 to 1.9	1.5 to 2.0

If the economy under performs or even tracks the November projections, QE3 would seem likely at either of the two day meetings in April or June. Some have argued that QE3 could happen sooner, perhaps at the March meeting. Based on these projections, QE3 is very likely.

by Calculated Risk on 1/25/2012 12:30:00 PM

Note: The Summary of Economic Projections (SEP) will be released around 2 PM ET (including the new FOMC forecasts for the federal funds rate), and Ben Bernanke will hold a press briefing starting at 2:15 PM.

FOMC Statement:

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.

by Calculated Risk on 1/25/2012 10:00:00 AM

From the NAR: Pending Home Sales Decline in December, Remain Above a Year Ago

The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 3.5 percent to 96.6 in December from 100.1 in November but is 5.6 percent above December 2010 when it was 91.5. The data reflects contracts but not closings.
...
The PHSI in the Northeast declined 3.1 percent to 74.7 in December and is 0.8 percent below a year ago. In the Midwest the index rose 4.0 percent to 95.3 and is 13.3 percent higher than December 2010. Pending home sales in the South slipped 2.6 percent to an index of 101.1 in December but are 4.9 percent above a year ago. In the West the index fell 11.0 percent in December to 107.9 but is 3.7 percent higher than December 2010.

by Calculated Risk on 1/25/2012 08:38:00 AM

From the MBA: Mortgage Applications Fall by 5 percent in Latest MBA Weekly Survey

The Refinance Index decreased 5.2 percent from the previous week. The seasonally adjusted Purchase Index decreased 5.4 percent from one week earlier.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.11 percent from 4.06 percent ...

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 4.39 percent from 4.40 percent...

The following graph shows the MBA Purchase Index and four week moving average since 1990.

Click on graph for larger image.

The 4-week average of the purchase index increased slightly last week. This index has mostly moved sideways for the last 2 years, and is at about the same level as in 1997. The refinance index will probably increase later in February or in March at the HARP refinance program picks up.