FOREX TRADING

December 15-16 FOMC Minutes Highlight Risks that Securitization Markets are “Still Substantially Impaired”

The minutes of the December 15/16 meeting suggested that most members saw recent economic data as consistent “moderate growth and subdued inflation in 2010.” As a result, the Fed saw little reason to change either the target range for Fed funds of 0 to ¼ percent or the large-scale asset purchase programs. This outlook also provided no reason to alter the central bank’s assessment that these exceptionally low interest rates would continue to be warranted “for an extended period.”

However, the minutes did present some interesting nuances to the above characterization of the economy. There had been some speculation that some better-than-expected economic data, though unlikely to prompt any change in interest rates, might prompt some discussion of more aggressively winding down the asset purchase programs. The minutes, in fact, revealed that though “one member” saw the need to scale back these programs, a “few members” saw the potential need to expand and extend such purchases. As well, the minutes make a number of references to the fact that the improvements in the functioning of “securitization markets were lagging behind those of other financial markets.” The concern was also expressed that winding down of the MBS purchases could put upward pressure on mortgage rates threatening recent signs of an improving housing market.

The description of the economy and financial markets suggests a Fed in no rush to start tightening policy. Certainly Fed funds is likely to remain within its current range through most of this year. However, with respect to the asset purchase programs, a larger number of members still seem to feel that the greater need was to expand these programs rather than to scale them back more quickly. This implies a Fed still very cautious about the modest nature of the recovery and the risks that financial markets not fully recovered.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.