Today’s FOMC Statement

March 20, 2013

Today’s statement from the Federal Open Market Committee repeated the January 30th statement in most respects, including

  • The retention of all existing interest rate and quantitative monetary policy settings.
  • The retention of the same economic data-driven policy guidelines for the future of the federal funds target.  These are thresholds, not targets that would automatically necessitate policy changes. No guidelines have been quantified for the unconventional purchase of long-term assets.
  • Usage of a framework tied quantitatively to the dual mandate of promoting maximum employment and price stability.
  • A single dissent cast by Kansas City Federal Reserve President Esther George, who is “concerned 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.” 

The statement upgrades labor market conditions and the housing sector but adds the clause that “fiscal policy has become somewhat more restrictive.

A third factor was added, highlighted in italics, for determining changes in quantitative easing: “In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

New forecasts of macroeconomic trends and the preferred future path of the fed funds for individual members were published.  While projected GDP growth was revised down marginally, so too was the unemployment rate.  The latter doesn’t fall below 6.5% until 2015, however, and the personal consumption expenditure price deflator doesn’t climb above 2.0%, let alone to 2.5%, during the entire forecast horizon through 2015.  In short, the forecasts do not reach the thresholds for raising Federal funds target of 6.5% of lower unemployment or, through 2014, expected inflation out a year exceeding 2.5%.

Frequency distributions of individual fed funds preferences are consistent with the macroeconomic forecast.  Only one of 19 members wants a rate hike this year, and 14 of them do not want the first increase before 2015.  The modal fed funds target lies at 0-0.25% in 2013 and 2014 but rises to 1.0% in 2015. Eight of the members do not see the rate in 2015 higher than 0.5%, and just two would like the rate at the end of that year to exceed 1.25%.

Bernanke’s comments were forthright but did not tend to expand the sense of what the Fed is doing.  I found particularly revealing the distinction drawn between thresholds rather than targets of the 6.5% unemployment rate level and 2.5% expected inflation for deciding when to lift interest rates.  His responses mainly conveyed information that had been conveyed before or, if not, were predictable.  A number of questions concerned Cyprus.

There was little market reaction to the FOMC written and spoken comments today.  Between the release of the statement at 14:00 EDT and 16:10 EDT, The S&P 500 and Nasdaq each rose 0.3%, while the DJIA ticked up 0.1%.  The 10-year Treasury yield rose a basis point.  Oil firmed 0.2%, while gold edged down 0.1%.  The dollar advanced by 0.4% against the yen and 0.1% relative to the euro.

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

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