FOMC Upgrades Labor Market. No Real Change in Uncertain Tone

by devteam December 16th, 2009 | Share

As always, I have over-analyzed the text of the FOMC statement.

Below is the December 2009 FOMC Statement. I have picked it apart to draw attention to alterations. My comments are in bold, FOMC statement text is italicized. Additions made to the text are highlighted

For immediate release.

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating.

I used this statement update in my headline because this addition to the text was the source of knee jerk weakness in the bond market at 2:15pm. This is an upgrade to the Fed's outlook on the labor market, however I do not view this as a sign of IMPROVEMENT as much as I take this as a way for the Fed to say that job losses are moderating and the day's of 350,000 NFP prints are behind us. This is more stabilization rhetoric than recovery rhetoric.

The Obama Administration is currently scrambling to ensure this statement doesn't evolve from “deterioration is abating” to “deterioration has abated but job creation strategies have proven ineffective”. That should be the focus here..yes the labor market has stabilized but job creation remains a concern.

The housing sector has shown some signs of improvement over recent months.

Last month this read: “Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. ” In this month's statement, the Fed removed the reference to financial markets and updated the housing sector verbiage to “has shown some signs of improvement”.

While this does not greatly differ from the previous statement, to me it does imply the Fed is not all that confident in the stability of the housing market. I say this because they changed the text but didn't really change the tone of their outlook. We all know that housing remains incredibly weak and that “signs of improvement” are more or less a result of record low mortgage rates and government stimulus.

As far as future progress in the housing market, much is dependent upon JOB CREATION. No job = no income = no mortgage. Also working against a housing recovery are tighter lending guidelines. While better underwriting standards are more likely to draw in private mortgage investors, they are no allowing many borrowers to take advantage of near record low mortgage rates and reduce their monthly payments. Counterproductive forces working against each other here…

Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.

The Fed inserted “at a moderate rate” but left the caveat “appears to be”. While the addition of “at a moderate rate” should instill some feeling of momentum in the outlook for household spending, the continued use of caveats following the statement plus the not so confident phrase “appears to be” doesn't do much to clear up the outlook for consumer demand. If the labor market continues to sit stagnate and credit conditions don's loosen, household spending will “appear to be” flat. Again I must point out the relative perspective vs. the absolute perspective. Relative to last year, conditions have improved. On an absolute basis, the health of the consumer has just not gotten worse, household spending has stabilized, but progress has been minimal and inconsistent.

Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales.

No surprises here. This statement reads almost the same way it did last month, except the lack of job creation got a little more attention in today's release. Given the already discussed weak outlook for rapid job creation, business investment will be a key factor if the market is to believe in a business spending led  “jobless recovery”, something many economists are predicting will be the catalyst for future economic growth. Once business investment does pick up it will likely be as a result of companies looking to implement new technology into their work flow and further increase efficiency. This implies our labor force will be relied up on less for manual labor. Go back to school, be the best at what you do!

Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

The one theme I would have to say has been a constant all year : IT'S A TRADER'S WORLD, WE'RE JUST LIVING IN IT!

All the profit churning performed in the marketplace this year has put money back in the pockets of investors, re-built bank balance sheets, instilled lost confidence,  and created “warm and fuzzy” feelings in headlines. Basically, Fed liquidity programs and record low Fed Funds rates have made it easy for financial institutions to turn a profit in financial markets, which in turn be another catalyst for the overall economy to get going in the right direction.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

NO CHANGE TO THAT STATEMENT…HIGH UNEMPLOYMENT RATES AND EMPTY MANUFACTURING PLANTS ARE PREVENTING WAGE GROWTH. CONSUMER SPENDING IS EXPECTED TO REMAIN WEAK, WHICH REDUCES PRESSURE ON PRICE LEVELS TO RISE. If consumers aren't spending, businesses can't charge more for their widgets. The one conern is the value of the dollar though, if a weak dollar pushes commodities prices higher, consumers may find themselves with less purchasing power as food and energy prices tick up. (Cost Push Inflation). Then again, if the demand side of the equation remains weak, oil prices won't have much reason to rise on supply/demand concerns.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Fed removed the sentence “In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability”, but did not change the “extended period” verbiage, which was  a wish of many market watchers. This basically tells us that the Fed has done almost everything it could do to stabilize the economy and promote recovery. It may also have been a play against those who constantly call to attention the notion that the Fed is printing money. Perhaps some will view this is a sign of the Fed's reluctance to create and implement new strategies that would lead to more “printing press” outcries.

Also, as a reminder, this text was added to the November statement:  “including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant” 

I think it is important to point this out again because the Fed is giving us hints at what might warrant a shift in monetary policy. The Fed telling us the following: If the rate of inflation increased or the market's inflation expectations start to worsen (market thinks prices are going to rise) OR if resource utilization improves..the FOMC will have to start considering rate hikes.

Resource Utilization:  the inputs that go into goods and services production like PEOPLE, machines, tools, warehouses, trucks, trains, planes, working capital are used being used efficiently…specifically LABOR.

Essentially the FOMC is saying “if this happens” you should prepare for us to raise the Fed Funds rate. Unfortunately we wouldn't have to wait for the FOMC to raise rates though, if econ data implies the FOMC metrics dont warrant “exceptionally low rates”….the bond market, currencies, commodities, and equities will automatically price in a Fed rate hike.  View it as a self-policing mechanism for the marketplace.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.


In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

This entire paragraph was new, but doesn't really provide any new information. It was more of a reminder than anything, which we already did HERE. However I would again point out the inclusion of another “BUT” statement at the end of the text : “The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.. Anything can happen if the conditions warrant!

All voting members AGREED on the decision. No dissenters.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.


Only a few changes were made to the statement. All of which served to imply continued stabilization and marginal improvement from record low levels. The FOMC's most meaningful tweak has been an upgrade to the laborrnmarket – “economic activity has continued to pick up and that therndeterioration in the labor market is abating.” Besides that…the Fed is treading water and we know nothing new about when to expect a rate hike.

Looking forward…

My outlook remains the same. Nothing new was said today that would push my bias towards lower mortgage rates in Q1 2010. I still see more reasons for rates to rise than for rates to fall. READ MORE

Economic uncertainty persists…just remember what matters most is what the market THINKS the Fed is planning on doing. 

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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