As I Expected, Fed Refrains From “Tapering”
As I expected, the Fed refrains from “tapering” as economic data did not show sufficient improvement of the economy. The Fed notes that since the last FOMC meeting, mortgage rates have risen further, the unemployment rate has remained elevated, inflation has been persistently below its 2 percent objective and fiscal policy is restraining economic growth.
Some extracts from the Fed:
Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
In this context, the Fed reviseD downward its growth and inflation forecasts. Moreover, as far as the appropriate timing of rates’ hike, the participants moved out a little with two participants now seeing the first increase in 2016.
- 2013 GDP 2.0-2.3% (prior 2.3-2.6%)
- 2014 GDP 2.9-3.1% (prior 3.0-3.5%)
- 2015 GDP 3.0-3.5% (prior 2.9-3.6%)
- Initial 2016 2.5-3.3%
- Longer run GDP 2.2-2.5% (prior 2.3-2.5%)
2/ PCE inflation:
- 2013 1.1-1.2% (prior 0.8-1.2%)
- 2014 1.3-1.8% (prior 1.4-2.0%)
- 2015 1.6-2.0% (prior 1.6-2.0%)
- Initial 2016 1.7-2.0%
3/ Rate Path:
- 0 officials sees first hike in 2013 (1 prior)
- 3 see first hike in 2014 (3 prior)
- 12 officials see first hike in 2015 (14 prior)
- 2 sees first hike in 2016 (1 prior)
Finally, at the press conference, Bernanke insisted on rates and was “very dovish” underlining that:
1/ Rates increases possibly may not occur until unemployment is considerably below the 6.5% level.
2/ Unlikely to raise rates if inflation remained well below 2% target for some time.
3/ Even after QE is wound down, Fed rate policy and large balance sheet will promote highly accommodative policy for some time.
The most important point is that Bernanke acknowledges that some of the recent decline in unemployment rate has been due in part to lower participation rate. Despite a downward trend in participation rate due to aging population, there is a cyclical component to labor participation rate which means that a lot of people could come back on the labor market.