There are 8 meetings of the Federal Open Market Committee (FOMC) each year. The second of four two-day meetings begins today. There is speculation that the days of unambiguously dovish policy rhetoric could be numbered. The minutes to the 13 March FOMC meeting, released on 3 April, confirmed stronger forecasts for both economic growth and inflation. Against the background of forecast-based policy, which has been embraced by the Fed under Chairman Bernanke, it seemingly becomes very difficult for the Fed to justify further monetary easing.
It is normal for the opinion of the Fed Chairman to carry greater weight than other participants on the FOMC. The fact that there has been dissention, in varying degrees, since 2010 has meant nothing: the views of the Chairman have carried the day. Fed Chairman Bernanke is now questioning the need for further quantitative easing. It would seemingly imply that such policy measures are shortly to be confined to the history books.
Economic Perceptions within the Fed Have Not Shifted Much
Despite the upgrading of forecasts for economic growth and inflation at the 13 March FOMC meeting, unemployment is still forecast to be 2-3 percentage points highest than its mandate of “maximum sustainable employment.” While the doves on the FOMC would still argue that this represents an undesirable outcome, they are probably close to admitting that policy conclusions for the current economic cycle require revision.
Labour Market Dynamics Continue to Baffle the Fed
Recent speeches by Fed Chairman Bernanke have been stressing the abnormal conditions prevailing in the US labour market. Historically, faster economic growth is associated with significant increases in labour demand, as testified by meaningful declines in the civilian unemployment rate. This relationship appears to have recently broken down. In 2011, real GDP grew just 1.7%, while the unemployment rate fell from 9.4% in December 2010 to 8.5% 12-months later. The decline in the unemployment rate appears large relative to the growth of the economy. Is economic activity being understated? Real GDP data for 2011 will be revised in July under the annual benchmark revisions. The Fed will pay careful attention to any upward revisions to economic growth.
