In the heat of August, the Federal Reserve didn’t want to say the U.S. economy was getting better. It chose the phrase “leveling out.”
It was as if the policymakers collectively squinted in August and saw a barely flickering light at the end of the recessionary tunnel.
In this cooling September, the light still requires a squint but it seems to have stopped flickering quite as much. Improvement.
In the time between Aug. 12 and today, information suggests U.S. economic activity has “picked up,” the Fed statement closing out its two-day policy meeting said.
“Picked up” in Fed parlance is reasonably bold. It is straightforward. It leaves minimal wiggle room. The economy is simply getting better.
Household spending “seems to be stabilizing,” the Fed said today, which is just a tad better than August’s “continued to show signs of stabilizing.”
But in this important consumer category, the usual engine of growth for both the U.S. and global economies, the caveats loom large. They are important words chosen by the Fed, and its Open Market Committee used them today and used them back in August.
Ongoing job losses, sluggish income growth, lower housing wealth and tight credit haunt consumer spending, the Fed said.
On the business side of the equation, the Fed categorizes things as less bad, not good. “Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Fed said today.
All this tea-leaf reading about the economic and inflation outlook (on the latter the U.S. central bank remains sanguine) is necessary because the Fed remains deeply inactive, as it should be, when it comes to actual changes in interest rate policy.
It has done nothing new (target range for Federal Funds 0% to 0.25%) and will do nothing new on policy for a long time.
There is no reason to do a thing, because slowly but surely things are going the Fed’s way. The economy is a bit better or a bit less bad. Financial markets are a bit more normal. Equity prices are way up, higher than many think they should be, but their very buoyancy informs and aids the economic recovery.
The Fed will not do a thing on policy for as long as it can. Chairman Ben Bernanke laid out an “exit strategy” to be put in place once the economy is in full repair and the Fed has to start undoing all the monetary ease and financial underpinning it provided in the heat of the crisis.
That was smart. It helped restore confidence. So the Fed wants to be very cautious now, not even hinting at an exit strategy ujntil the need to start actually exiting is in sight. We are not there yet and the Fed needs not inspire undue speculation.