The FOMC again referred to the economy as “expanding moderately” in its statement. They acknowledged that “labor market conditions have improved further” and “the unemployment rate has declined notably in recent months” but it “remains elevated.” They repeated that household spending continued to advance but added cap ex spending did too. They also said again that “the housing sector remains depressed.” On inflation, they continued to be sanguine even though they admit that “prices of crude oil and gasoline have increased lately.” They again think this is temporary. They said “longer term inflation expectations have remained stable” even though they have not as 5 yr and 10 yr inflation breakeven levels are at the highest since last summer. They also acknowledged that “strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.” Policy in response to the above all remains the same and Lacker again dissented on saying that rates will stay “exceptionally low…at least thru late 2014.” Bottom line, in terms of market response, the statement is a non event. Looking past this, the April meeting will give us color on the fate of OT in June and as long as doves populate the FOMC, the Fed will do more if the economy and markets turn down at some point. The kryptonite though of the Fed in my opinion has reared its head and that’s inflation and that can single handedly alter the grand plan of the Fed to ‘save’ the US economy.
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