Right after the Federal Open Market Committee makes its post-meeting announcement this afternoon, I’m going to walk into Google’s San Francisco office to jabber about my book (as part of the Authors@Google program). This means it would be very convenient for me if the FOMC’s announcement weren’t particularly newsworthy. So you may want to add several grains of salt to my prediction that … the FOMC’s announcement won’t be particularly newsworthy.
The Fed won’t make any change in short-term interest rates (currently hovering between 0 and 0.25%), that’s for sure. They have ceased to be the main tool of monetary policy for the time being, replaced by the Fed’s various asset-purchase programs. Fed chairman Ben Bernanke gave an outline of the likely exit strategy from these programs last month—it’s a mix of letting them unwind automatically as markets improve, and doing semi-incomprehensible Fed stuff like “arranging large-scale reverse repurchase agreements with financial market participants.” The former is already happening to a certain extent, the latter isn’t in the cards until the economy begins to show sustainable growth (that is, growth that isn’t driven mostly by federal stimulus spending and super-accommodative Fed policy).
Neil Irwin at the Washington Post does speculate that the Fed might choose to make clear that a couple of the asset-buying programs won’t be extended past their current expiration dates, but I’m mostly with Ian Shepherdson of High Frequency Economics, who wrote in a report to clients yesterday afternoon:
[W]e would be astonished to see anything in the statement which could reasonably be construed as a shift in the Fed’s core position, namely that the economy will be weak for an extended period, inflation will be subdued for the foreseeable future and policy remains on hold. Mr. Bernanke knows very well that in deep recession a policy response to the first signs of growth—especially growth that is due entirely to discretionary policy stimulus—can do great damage.
Bernanke’s not the only person on the FOMC, and one thing that might happen soon is that signs of dissent begin to appear from a hawkish Federal Reserve Bank president or two. But that won’t change the Fed’s policies.