In his speech,“How Far Is the FOMC from Its Goals?”, on June 9 at the Tennessee Bankers Association’s annual meeting in Palm Beach, Florida, James Bullard said the FOMC is closer to its goals now than it has been in the past five years.
The credit crisis of 2008–2009 has caused significant damage to the U.S. economy. Over the past five years, the unemployment rate in the U.S. has remained pretty high. At the same time, the inflation rate has remained far below the targeted 2%. The FOMC has, since then, come a long way in getting the economy back to its pre-crisis state.
The Fed’s performance
With the FOMC’s measures, such as quantitative easing, the Fed is doing a good job. Quantitative easing is the Fed’s way to pump liquidity into the economy by massively buying mortgage and Treasury bonds from the market. The credit market for these securities had gone dry following the credit crisis due to a lack of consumer confidence and demand—especially in the mortgage market. With the federal government stepping in to invest in these securities, consumer confidence seems to be reviving.
The Fed’s asset purchase program is intended to provide enough liquidity in the market. A lower Fed funds rate results in credit growth, resulting in higher liquidity. Once the Fed sees that the economy has recovered and is sustainable even if the Fed tightens its liquidity, it may start increasing the Fed funds rate. ETFs like the ProShares Short 20+ Year Treasury (TBF), the HOLDRS Merrill Lynch Pharmaceutical (PPH), and the Vanguard Information Tech ETF (VGT), whose major holdings are in information technology companies like Apple Inc. (AAPL) and Google Inc. (GOOG), could help investors, as these ETFs generally do well during the early part of a tightening cycle.
The FOMC’s dual goals of maximum employment and price stability are both nearing their respective targets. With economic recovery, the job situation in the U.S. has shown improvement, as the downward trend in the unemployment rate reflects. The inflation rate, though low, is slowly moving back towards its target rate of 2%.
Currently, the FOMC is much closer to its macroeconomic goals. Bullard went on to provide a measured perspective on his judgment with respect to the FOMC approaching its target. Find out more in the next part of this series.