The Federal Open Market Committee (FOMC) voted to maintain its current easy stance towards monetary policy. Specifically, the FOMC held onto its stance that it would hold the fed funds rate at or near zero until late 2014. This is despite a slight upgrade in the forecast for 2012, and a slightly lower unemployment rate projection for year-end.
The dispersion of forecasts was tighter than the last time Chairman Ben Bernanke presented the Fed’s outlook. Those expecting the Fed to hold off raising rates until 2016,in particular, have moved their projection for a hike in interest rates up by about a year.
That said, the Fed is still clearly hedging downside risks. Europe, in particular, has reemerged as a primary risk to the outlook. A financial meltdown in Europe would prompt the Fed to act; the question is how much of an impact monetary policy can have at this stage of the game. Moreover, the forecasts for 2013 and 2014 were downgraded, which justifies the Fed’s current easy approach to policy.
Bottom line: Voting members at the FOMC are still more dovish than hawkish, and feel somewhat vindicated now that the seasonal boost to growth has begun to play out. The risks associated with Europe, oil prices and fiscal policy are clear headwinds and tail risks to the outlook.