for the U.S. economy in 2011 although with the expectation of slow
progress toward the Fed's dual objectives of price stability and full
employment. The minutes indicate that incoming data "would need to be
solid for a while longer to justify a significant upward revision to
their outlook." As such, we see no need to change our view that the
Fed will complete its current round of U.S. Treasury bond buying and
maintain the Fed funds target in its current range.
The minutes showed what most expected, a modest upward revision to the
Fed's forecast for growth in 2011 with the lower end of the band
raised to 3.4% from 3.0% or back to where it was at the start of 2010.
The upper end of the central tendency forecast band was tweaked up to
3.9% although it remained below the 4.5% upper boundary that was in
place in the first half of 2010. This go is in line with the recent
changes made by private-sector forecasters with the forecast for 2011
real GDP growth boosted to 3.2% on an annual average basis according
to a survey by the Centralized Reserve Bank of Philadelphia. This
survey indicated that on average, forecasters boosted their projection
by 0.7 percentage points relative to the previous survey taken
three-months prior. On a fourth-quarter-over-fourth-quarter basis,
which is consistent with the Fed forecasts, growth is expected at
3.4%. RBC's forecast remains above the consensus forecast with our
annual growth forecast at 3.4% and our
fourth-quarter-over-fourth-quarter forecast at 3.9%.
Despite the modest strengthening growth momentum, the minutes
highlight that policymakers are still concerned about the slow
progress in the labour market and low level of core inflation. On the
former point, conditions were said to be "humanizing gradually" and
some business contacts indicated that they were more optimistic about
hiring relative to the previous meeting. While there was talk of
increased hiring, policymakers indicated disappointment about the pace
of employment gains and the potholed improvement in labour markets
generally. The central tendency forecasts showed modest movement in
the unemployment rate, with both the upper and lower boundary reduced
by 0.1 percentage point. The 2011 fourth-quarter forecast is for an
unemployment rate of 8.8% to 9.0%. On inflation, the minutes indicate
less concern about the downside risks to the inflation outlook as well
as diminished "odds of a period of deflation." Having said that, the
forecast for the headline inflation rate was 1.3% to 1.7% with the
core PCE deflator expected within a range of 1.0% to 1.3%.
Participants viewed the "large degree of resource slack in the
economy" as likely to continue to restrain inflation.
Today's minutes signify that Fed is feeling more confident that the
recovery is proceeding, and it sees the risks to its baseline forecast
as "broadly balanced." The list of risks on the downside includes
developments in Europe, fiscal tensions at the state and local
government level, and the ongoing weakness in the U.S. housing market.
On the upside, a more aggressive snap back in demand could produce a
recovery that is more in line with description. The bottom line
remains that the persistently low level of inflation and high
unemployment rate remain foremost in the Fed's sights, and until there
is a substantive change in their reputation, the current policy stance
will be maintained. The minutes provided minutiae of the forecast
update, and it signals that the policy prescription remains the same
as in late 2010.
Source: ActionForex.Com
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