COLUMNISTS The skill of reading between the lines of Federal Reserve statements has not been in demand since the credit crisis started. Like Kremlinologists who made a living analysing the Politburo’s seating plans, Fed-watchers’ talents have seemed outdated. The Fed’s actions have spoken louder than its words.
In this respect, Wednesday’s communiqué from the Federal Open Markets Committee is a return to normality. There was no surprise on interest rates, and only minor technocratic tinkering with its plan to buy Treasury bonds. Without changing the sums involved, this programme will peter out by the end of October, rather than ending abruptly next month.
But the language on the economy, with only 10 words altered from the FOMC’s June statement, is more intriguing. The economy is “levelling out”. And the list of constraints on consumption has expanded to include “sluggish income growth”.
Monday brought the news that US productivity was improving. With hours worked down 7.6 per cent and output down only 1.7 per cent, labour is losing to capital. This helps profits and limits the risk of disaster but it weakens the consumer and the hopes for a strong rebound.
The bottom line? The Fed thinks that the forces arrayed against a strong economic recovery remain powerful and it still sees no risk of resurgent inflation (on which its words are unchanged). So it is not yet preparing an “exit strategy”. Higher rates seem unlikely to start within six months, as signalled by the markets.
But the Fed does seem to believe that a recovery of sorts is under way and does not feel the need to signal more bond purchases. Taken together, this is positive for equities as far as it goes. It is not surprising that the S&P 500 ended the day nudging its highs for the year.
