New FOMC Statement Not More Hawkish than December Statement

January 30, 2013

Based on minutes of the December meeting, it had seemed plausible that the Fed might tweak the communication of its policy in such a way as to suggest greater consideration over an earlier end to quantitative easing than imagined previously.  That didn’t happened.  Nor did today’s statement change any existing policy, which was as analysts were predicting.  Guidance on the 0-0.25% Fed funds rate target remains anchored to the future jobless rate and the core personal consumption price deflator.  Unless officials see unemployment dropping under 6.5% or start projecting inflation above 2.5%, the rate corridor is going to stay put at the current “highly accommodative” level. 

The FOMC had not similarly tied quantitative stimulus quantitatively to future economic trends, and that step wasn’t taken today, either.  For now, the Fed will continue to buy $40 billion of mortgage-backed securities and another $45 billion of longer-dated Treasuries, whle reinvesting principal payments, so that its balance sheet’s size doesn’t shrink passively.  QE is likely to end before a rate hike is sanctioned, but there is no hint in today’s statement that officials expect QE to stop sooner than what they were expecting at the December meeting.

Several points were made about economic developments since the December meeting.

  • Last quarter’s pause in growth was caused in large part (but not entirely) by transitory factors.
  • Inflation continues to run below the Fed’s longer-term preference.
  • Global financial market strains have eased somewhat but still pose a potential downside growth risk.
  • The statement failed to note explicitly a sizable rise in oil prices, the euro, and Treasury yields since the last meeting or comment and possible consequences if those changes are sustained or get extended.

By custom, there has been a rotation of regional Fed presidents who are eligible to vote on policy.  Richmond Fed Pdt Lacker, who dissented at all of last year’s meetings to argue for a less dovish stance in deed and rhetoric, no longer gets to vote.  But K.C. Fed Pdt Esther George does, and she took the torch from Lacker, expressing concern “that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”  Consequently, today’s policy vote was split 11-1. 

An interesting twist in the statement involves the relationship between policy and the labor market mandate.  Previously and including in December, the Committee worried that “without sufficient policy accommodation, growth might not be strong enough to generate sustained improvement in labor market conditions.”  That thought today was inverted to state the expectation that “with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”  While making the same point, this reversal of how it was expressed conveys a deeper commitment to meet its twin policy mandates.  The inflation and unemployment objectives will be met because policy will be adjusted to make it so.  The resolve of the Fed to lift inflation and reduce unemployment should not be doubted.  But inevitably, there will continue to be non-believers given the possibility of changes in the FOMC’s composition over time.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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