Fed Stays the Path, but Adds a Hint of Optimism

After a very consequential Federal Open Market Committee (FOMC) meeting in November, the Fed's December meeting provided no surprises. It will continue to purchase additional longer-term assets, as planned. While its statement differs little from its November release, the committee does sound slightly more optimistic about the recovery this month.

Let's start with the quantitative easing program. It will continue, precisely as explained last month. The Fed must think it's necessary to reaffirm this because it has promised to "adjust the program as needed" to accommodate how the market changes. Since the economy's path hasn't taken any significant turns for better or worse since its November meeting, most of the committee members see no need to modify the program at this time.

If there is anything at all of significance in December's statement, it's the Fed's hint of optimism. Committee members are not exactly doing cartwheels in to celebrate the recovery, but they appear to think it's not quite as weak as they portrayed in November.

Some evidence to this slight tonal shift can be found in the statement's first paragraph. This month, the FOMC says that the "economic recovery is continuing," though unemployment is not improving. Last month the committee members complained that the pace of the recovery in both output and employment "continues to be slow."

They also appear to be slightly more bullish on household spending. The December statement says:

Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

Contrast that with last month's statement:

Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

The emphasis is mine, and shows that they see some improvement in this indicator. This is an important economic consideration, however, as many firms blame weak spending as their reason for so little hiring.

Finally, as usual, Kansas City Fed President Thomas Hoenig dissented with the action. But this time, he noted the improving economy as the reason for his concern that the Fed intervention could lead to financial imbalances and increase in long-term inflation expectations that could destabilize the economy. And as always, he was the only committee member to dissent.

Other than these slight tweaks, the two statements were virtually identical. The Fed certainly didn't use the statement to respond to any criticism of its new quantitative easing program that became so prevalent after its decision last month. The committee also didn't express any concern that interest rates are rising, despite its effort to keep them low. We'll have to wait a few weeks until the minutes are available to see if any of these issues were addressed in the meeting.

The FOMC will not meet again until late January. At that time there will also be some new committee members, consisting of the regional presidents from Chicago, Philadelphia, Dallas, and Minneapolis. The regional presidents from Cleveland, Boston, St. Louis, and Kansas City will be swapped out out of the rotation. That means today's meeting was Thomas Hoenig's final opportunity to dissent until his region gets swapped back into the FOMC sometime after 2012.