By Brai Odion-Esene

WASHINGTON (MNI) – The decision by the Fed’s policymaking Federal
Open Market Committee Wednesday to continue its maturity extension
program for another six months does not preclude the central bank taking
additional monetary action this year, Fed watchers told MNI.

In its policy statement, the FOMC stressed that, “The Committee is
prepared to take further action as appropriate to promote a stronger
economic recovery and sustained improvement in labor market conditions
in a context of price stability.”

That was evidence of the door is not closed on more quantitative
easing, economists said.

“This move by the FOMC is an easing to be sure, but in some sense
we would also describe it as a maintenance of effort,” Credit Suisse
economist Dana Saporta told MNI. “I don’t think this move necessarily
rules out further easing by the Fed.

“The timing will of course depend on the markets and the tone of
the economic data,” she added.

HSBC Chief Economist Kevin Logan told MNI the Fed announcement does
not preclude additional monetary action this year. Instead, it suggests
that if there is no improvement in labor market conditions as the year
goes on “then they are setting up for further easing.”

Saporta said any further easing this year would be in the form of a
third round of quantitative easing or an outright purchase of
securities.

“But I don’t think that operation would be taken lightly, it would
have been fairly obvious that it’s needed before the Fed took such an
aggressive step,” she added.

Barclay’s Michael Gapen agreed, writing in reaction to the FOMC
announcement that he takes “further action,” to mean asset purchases,
“and we see conditions in labor markets as a primary determinant of
whether or not the FOMC takes this step.”

“In the upcoming press conference we look for the chairman to
highlight these points: that the door remains open to further action and
that the labor market remains a key determinant of how the Fed will
decide its future policy actions,” he said.

TD Securities’ Eric Green said the Fed is signalling they will do
more if necessary “depending how risks evolve.”

In its assessment of economic conditions, the FOMC said economic
growth would remain moderate over coming quarters and then pick up “very
gradually,” where before it had said it was just gradually.

Regarding the jobs outlook, the committee no longer says labor
conditions “improved,” but that “growth in employment has slowed in
recent months.”

It anticipates unemployment will decline “only slowly” toward
levels consistent with mandate. Following the last meeting in April, the
FOMC expected the jobless rate to decline gradually.

As a result, the FOMC chose to continue its program to extend the
average maturity of its securities holdings, saying it will sell
Treasury securities with remaining maturities of three years or less and
purchase Treasury securities with remaining maturities of six to 30
years through the end of the year. The Fed estimates that this will
result in approximately $267 billion of sales and purchases at the
current rate.

“We were expecting an extension of operation twist,” Saporta said,
and that was largely built into market expectation.

“But this extension is less aggressive than we anticipated,” she
said. “It does not include buying Treasuries and MBS. That’s why we are
describing it as a maintenance of effort than something more dramatic.”

She said at $267 billion, the maturity extension program “is a
little bit smaller than we had thought,” saying her expectation had been
for the Fed to sell maturities up to four years and buy at a slighter
faster pace of about $50 billion per month.

But BTIG LLC’s Chief Global Strategist Dan Greenhaus said, “The
$267 billion is a bit higher than we anticipated given what securities
the Fed owns.”

HSBC’s Logan agreed the FOMC “did more than the minimum.”

They could have extended the program for just three months he said,
buying themselves some time to observe how the economy would unfold over
the next several months before deciding on a more aggressive easing
program.

The decision to go for six months “is a bit more of an easing
policy than many people anticipated but less than some people
anticipated,” Logan added.

“This is clearly a decision on their part to try to promote more
economic activity and in particular try to bolster job gains,” he said.

** MNI Washington Bureau: 202-371-2121 **

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