MARKET MOVER - BNP PARIBAS - Investment Services India

US FOMC: Just Doing My Job
• The FOMC delivered a statement at its
September meeting that formalised a bias
toward easing, largely as expected.
Chart 1: Underlying Inflation “Somewhat
Below” Fed’s Mandate
• It cited its inflation mandate three times,
noting that it is currently falling short.
• We think this sets the bar low for further
action. A failure to accelerate from the current
sub-par growth environment will confirm
something more pervasive than a soft patch and
will lead to further balance sheet expansion as
early as November.
• By proceeding methodically, the FOMC is
building credibility for its policy.
The FOMC delivered a statement at its September
meeting that codified a bias toward easing. The
Committee cited its mandate three times in the
statement, referencing inflation in particular. First, the
statement indicated the Fed is falling short of its
inflation mandate; second, it expressed confidence
that the mandate will be reached over time; and third,
it said the Committee might need to engage in policy
easing in order to achieve the mandate. We think the
take-away is that the data will need to materially
improve from the current sub-par pace of growth to
prevent the Fed from pulling the trigger on further
easing and we continue to see the November FOMC
meeting as the most likely time for the next phase of
balance sheet expansion. The FOMC has no choice;
it is just doing the job Congress mandated it to.
The statement included only modest changes to the
economic paragraph, noting that business
investment is rising "less rapidly than earlier in the
year" but also noting that bank lending continues to
contract "but at a reduced rate”. Clearly, the pace of
deleveraging is being factored into its outlook quite
explicitly and the slower pace of credit contraction is
being considered as a potential positive for growth.
The FOMC continues to cite the slowing in the pace
of hiring and growth, the gradual pace of
improvement in household spending and its
expectation that the economy will see a “a gradual
return to higher levels of resource utilization in a
context of price stability, although the pace of
economic recovery is likely to be modest in the near
term”.
Meanwhile, it strengthened its concerns about
deflationary pressures quite noticeably, saying
"Measures of underlying inflation are currently at
Source: Reuters EcoWin Pro
Chart 2: Rates Falling on Slow Growth,
Prospect of Policy Easing
Source: Reuters EcoWin Pro
levels somewhat below those the Committee judges
most consistent, over the longer run, with its
mandate to promote maximum employment and
price stability”. In other words, as noted in the August
FOMC statement, it is currently failing on its
mandate. The statement goes on to say that inflation
is likely to remain subdued for some time “before
rising to levels the Committee considers consistent
with its mandate”. While the Fed believes it will
succeed in its mandate, the question is how it will do
so. Either the economy will accelerate from here and
resource slack will close over time through organic
propulsion of economic growth or the FOMC will
need to stimulate the economy further through the
printing of more money to prevent a deflationary
dynamic from taking hold. One way or another, the
Fed will get the job done.
The statement also included a new policy paragraph
which indicated that “The Committee will continue to
monitor the economic outlook and financial
Julia Coronado 23 September 2010
Market Mover
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