The last few years since the 2007 crisis, central banks and governments have tried different recipes to bring back economic growth and prosperity. Besides the well known solutions, relax monetary policy, increase government spending and temporarily cut taxes, others more daring and untested were employes – quantitative easing, accepting lower rated collateral in exchange of liquidity, nationalizing entire banking sectors, accepting higher and higher budget deficits.
Unfortunately none of those have worked. The world is today facing the real prospects of another recession. In fact to me it has just been one long recession since 2008 especially for the private sector. And last night’s statement from the FED just proves that. The world, or at least monetary policy, has run out of instruments and ideas on how to deal with the current crisis.
The FOMC statement is not presenting a pretty picture and the first paragraph reads more like an eulogy. I know many analysts consider the recent soft data as mostly backward looking. Nevertheless, except for the positive surprise in NFP last week I do not see where other good news could be found. The trouble with NFP is that it has become excessively volatile in the last years and I am not sure how much faith we can put on very recent data.
Regardless, the key message in the FOMC statement is this:
” The Committee 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 mid-2013.”
With this assessment the FED is sending a chilling message to markets and politicians. What we should expect at best from the next couple of years is very low levels of growth and that the FED cannot do anything about it.
I do appreciate the FED not mentioning one word about QE3. At least, with current policy of zero rates we cannot help the economy too much in the short term but also we are not undermining potential.
Now, it looks like the key to recovery in the US and then globally rests with fiscal policy and the Congress. Hopefully they will rise to the occasion.
Full FOMC statement here.