The Federal Reserve’s Federal Open Market Committee (FOMC) has decided to continue its accommodative policies in an attempt to stimulate more growth. Specifically, the Fed said that “growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.” That coded language is a clear reference to Hurricane Sandy and the lead-up to the fiscal cliff deal. Both of them had significant negative impact on production and the business psyche as we ended 2012. Indeed, the Bureau of Economic Analysis announced earlier today that real GDP shrank by 0.1 percent in the fourth quarter of last year, with these factors clearly at play.
For the most part, today’s FOMC announcement was largely anticipated. The Fed will continue its monetary stimulus programs, which it announced in December, of purchasing $40 billion in mortgage-backed securities and another $45 billion in long-term securities each month. These purchases will continue to push down long-term rates, particularly for mortgages. In the process, it will help to prop up the housing sector, and to the extent that more Americans refinance their mortgages, it will also provide extra disposable income.
The Fed will continue these purchases as long as the unemployment rate stays above 6½ percent. In addition, it will continue to target long-term inflation of 2 percent. The FOMC will continue to maintain these policies so long as “inflation between one or two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal.” As always, the Fed will also look at other measures and react accordingly in the economic environment changes – an out in case the Fed needs it for flexibility.
The other notable element of this statement is the makeup of the FOMC itself. Each year, four of the regional Fed Presidents rotate on and off, with the New York Federal Reserve always having a voting seat. Those rotating on the FOMC in 2013 are the following:
- James Bullard (St. Louis)
- Charles Evans (Chicago)
- Esther L. George (Kansas City)
- Eric Rosengren (Boston)
The thing to watch this year will the interaction between the stated “inflation doves” (Evans and Rosengren) and “inflation hawks” (George). Indeed, Esther George picks up the pattern of dissention – seen in previous years from Fisher (Dallas), Lacker (Richmond), and Plosser (Philadelphia). Specifically, Esther L. George dissented this time because she was “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.”
Chad Moutray is chief economist, National Association of Manufacturers.