There was a little more talk at last week’s meeting of the Federal Reserve’s Open Market Committee. But when it came to any action, it was pencils down across the board. There were no votes for more economic stimulus. At least not yet.
In its statement, the Fed downgraded its view of the economy. In June, the committee said that the economy had expanded “moderately”. But last week, the data showed that “economic activity decelerated”. And the Fed strengthened its policy language. In June, the committee was “prepared” to take action to boost the economy if it needed to. Now the Fed “will” act to promote a recovery.
Saying that they “will” is one thing…actually doing something is another. But when the Fed is direct enough to say “will” in its language, it is sending a message. And the message is clear: they have their finger on the trigger. And they are inches from pulling it.
Still, even if the Fed announces more stimulus measures at its next meeting in September, it remains to be seen what kind of impact it will have. Experience has shown that the Fed’s policy moves have had an increasingly diminished effect.
But given the looming “fiscal cliff”, and the debt crisis in the euro zone, the risk of doing nothing is likely to outweigh any concerns about a muted impact.