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English to Chinese: US Economic Commen General field: Bus/Financial
Source text - English FOMC: Mission being accomplished
No rush to tighten, although some downplaying of downside risks on
inflation; asset purchases unchanged
The June 24 FOMC statement repeated the line from previous statements signaling
no increase in the funds rate for “an extended period.” Nor were there any changes
to the planned sizes of asset purchase programs. However, the wording on inflation
was slightly more hawkish than expected, with officials dropping the line
emphasizing the risk that inflation could be too low rather than too high. Although
downward pressure on inflation from slack was once again noted, officials
balanced that point with the observation that “the prices of energy and other
commodities have risen of late.” The change was perhaps a reaction to criticism
that Fed officials put too much emphasis on slack as a determinant of inflation,
although the near-term policy significance of the more balanced tone on inflation is
debatable. We believe the high level of slack will keep the trend in inflation
moving down in the year ahead, encouraging Fed officials to keep policy
stimulative well after the recession ends. Meanwhile, officials continue to forecast
a still-weak, albeit improving economy for “some time”; the change in tone on
growth relative to the April statement was fairly slight.
Forecast: no change in funds rate until mid 2010; Fed assets to peak sooner
We (UBS economists) continue to forecast no change in the funds rate until the
June 2010 meeting (to 0.5%), with the level up to a still-low 1% at the end of 2010.
Ahead of the release of today’s statement, the December 2010 Fed funds futures
contract was showing a 1.77% yield, down from a recent high of 2.22% (on June 8)
but still above our 1.0% end-of-2010 forecast. (After the statement, the yield rose to
1.84%.) Along with a slight increase in the funds rate during 2010, we expect total
Fed assets and the monetary base to start declining by early 2010, but not before
they are boosted further by follow-through on the already announced asset purchase
programs and the Term Asset-Backed Securities Loan Facility (TALF). (About $1
trillion of the $1.750 trillion in total planned asset purchases has yet to be reflected
in the Fed’s balance sheet; TALF lending currently totals just $25 billion.) The
levels of Fed assets and the monetary base will likely be historically high for a while
(more below).
We expect total Fed assets and the monetary base to start
declining before the first increase in the funds rate in mid-2010,
but only after further expansion from asset purchases and the
TALF. The expected declines reflect unwinding of some of the
special lending programs put in place in response to financial
turmoil, along with sterilization. The sizes of some programs
have already declined significantly, more than offsetting direct
purchases of Treasury and mortgage-related debt in recent
months, although we expect further net gains in aggregate in
coming months. We expect total assets, currently $2.1 trillion,
to reach at least $3 trillion before peaking.
Expertise