NEW YORK -- A recent statement by the Federal Open Market Committee (FOMC) covered the same ground as in mid-December 2011 with the U.S. economy expanding moderately while the global economy shows signs of a slower activity, RBC Economics Research reported today.

The Fed reiterated that "significant downside risks" continue to reflect the persistent volatility in global financial markets. The policy prescription was maintained with the funds target held at 0 to 0.25 percent, the extension of the average duration of the Fed's holdings and reinvestment of proceeds into agency mortgage-backed securities (MBS) were also left in place.

The Fed also affirmed that it continues to review the effectiveness of these policies and is prepared to adjust them if deemed warranted by the committee.

"Importantly, today's statement says that in order to achieve its mandate, the very low level of the policy rate may be warranted until at least through late 2014," said Dawn Desjardins, assistant chief economist at RBC. "Extending meaningfully its previous timeline of at least through mid-2013, the committee expects to maintain a highly accommodative stance for monetary policy."

"There was general consensus to this policy statement with the exception of Jeffrey Lacker who did not want to include the time period descriptor in the policy outlook statement," she added. 

As is common practice, the Fed will release its economic projections of growth, inflation, and unemployment at the chairman's press conference this afternoon.

"While today's press release did not make mention of the release of a new communication tool aimed at providing decision makers with a clearer read on the outlook for interest rates, a notice on the Fed's website on Jan. 20 indicated that members' projections of the timing of the first interest rate increase as well as forecasts for the Fed funds target at the end of the 2012, 2013, 2014, and the longer-term will be presented," said Desjardins.

"This change in its communications policy will act as a more comprehensive guide for markets regarding the path of monetary policy. At the chairman's press conference, market makers will be looking for insight into how the FOMC will approach the different paths deemed appropriate for the Fed funds rate by the committee members," she added. "Recent commentary suggests that there will be a significant divergence in the projections presented.

"Our view is that recent economic data suggest that the U.S. economy has been able to raise its game with solid employment gains recorded in December and the fall in claims pointing to another increase in January," said Desjardins. "Recent reports also point to the economy having grown at a 3 percent annualized pace in the fourth quarter of 2011 with early prints on regional purchasing managers indexes (PMI) showing that the momentum continued into the first quarter of 2012.

"These encouraging signs, however, are facing off with persistent uncertainty regarding the resolution to the European sovereign-debt crisis and have fed into some forecasts for global growth being downgraded," she added.

Yesterday, the International Monetary Fund (IMF) announced a 0.7 percentage point cut to its world growth forecast in 2012 and a 0.6 percentage point cut to 2013.

"Until there is a clearer path for the global economy and proof that the U.S. economy is able to grow fast enough to exert significant downward pressure on the unemployment rate, the Fed’s policy will remain extraordinarily stimulative," Desjardins explained. "Today's projections will provide some guidance as to when policymakers expect to make the first move to reduce monetary policy support."

Initial unemployment claims rise

In another report out this morning, initial unemployment insurance claims rose 19,000 to 377,000 in the week ending Jan. 21, partially reversing the previous week’s 46,000 drop to an upwardly revised 356,000 level.

The level of claims was slightly above market expectations for a rise to 370,000, said Nathan Janzen, an economist at RBC.

At least part of the sizeable rise in claims in the latest week may have been a result of difficulties seasonally adjusting the data around Martin Luther King Jr. Day holiday, he noted.

The four-week moving average of initial claims, which better controls for weekly volatility, dipped down to 477,500, thereby marking the second consecutive weekly decline in the measure from an upwardly revised 380,000 the previous week.

Continuing claims for the week ending Jan. 14 jumped 88,000 to 3,554,000, partially retracing a 181,000 decline in the previous week.

SOURCE: RBC Economics Research press release