MARKET MOVER - BNP PARIBAS - Investment Services India

developments and is prepared to provide additional
accommodation if needed to support the economic
recovery and to return inflation, over time, to levels
consistent with its mandate”. Here is the easing bias
laid out in Chairman Bernanke’s Jackson Hole
speech formalised in the FOMC statement.
If the data continue to paint a picture of sub-par
growth, the Fed will continue to fail in its mandates
and additional accommodation will indeed be
needed. The bar for action is therefore low; more of
the same will likely lead to policy action in November.
A material improvement in incoming data will be
required to forestall such an easing.
The Fed embarked on the path to policy easing in
June with a more dovish than expected FOMC
statement. This was followed by a discussion of
policy options in July at the Semi-Annual Monetary
Policy Testimony to Congress, a commitment to
reinvest the roll-off from its mortgage portfolio at the
August FOMC meeting, a frank step towards an
easing bias at Jackson Hole and a formalisation of
that bias by the Committee in September. This
methodical progression has helped build credibility
for further action without startling risky asset markets
or scaring investors away from US securities.
Should the data continue to suggest sub-par growth,
it will become clear that the economy is not just in the
midst of a temporary soft patch and the FOMC will
move decisively to address deflationary risks. By
tying policy actions more to its inflation than its
employment mandate, the Fed is more likely to
maintain credibility; monetary policy has a greater
ability to prevent deflation than to lower the
unemployment rate.
Yet a focus on inflation also allows the FOMC to
factor in the broad spectrum of economic and
financial market conditions. For example, if the
unemployment rate continues to rise, the downside
risks to inflation intensify and the Fed can justify
further policy action. We forecast the unemployment
rate will rise to 9.8% in Q4 and the Fed will expand
its balance sheet.
Julia Coronado 23 September 2010
Market Mover
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