The Federal Reserve kept its existing monetary policy actions in place at its latest Federal Open Market Committee (FOMC) meeting, which was expected. Regarding the current state of the economy, the FOMC noted recent progress in many of the key economic indicators since its last meeting. At the January meeting, the Fed had noted a “pause” in activity largely related to Hurricane Sandy and the lead-up to the fiscal cliff. Specifically, the Fed’s current statement says the following:
Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive.
Inflationary pressures appear to be in-check, at least for now, with prices at or below the Fed’s stated 2 percent goal. This frees the FOMC to continue to pursue its highly accommodating policies. This means that the Fed will continue to purchase $85 billion in mortgage-backed and long-term securities each month, helping to push down long-term interest rates. The Fed will continue to make these purchases until the unemployment rate reaches 6½ percent or until longer-term inflation consistently exceeds 2½ percent. In the event that either of these thresholds is reached, the FOMC would re-evaluate its current stance.
As with last statement, Esther L. George, the President of the Kansas City Federal Reserve Bank and a voting member of the FOMC this year, dissented. She remains “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.” Ms. George is one of the “inflation hawks” who continues to worry about the long-term impact of the Fed’s stimulative policies.
In addition to its FOMC statement, the Federal Reserve Board also released the latest economic projections which were used in its deliberations. For the most part, the forecasted ranges did not change much from its December estimates. Given recent improvements in the economic landscape, this is perhaps surprising. Nonetheless, the Fed predicts that real GDP should grow between 2.3 percent and 2.8 percent this year, increasing somewhat to 2.9 percent to 3.4 percent in 2014. These ranges were only marginally different from what was stated last time.
Likewise, employment growth is also expected to be slow. The unemployment rate should fall to 7.3 percent to 7.5 percent in 2013, 6.7 percent to 7.0 percent in 2014, and 6.0 percent to 6.5 percent in 2015. This suggests that the pace of hiring is anticipated to be modest at best, and moreover, it puts the FOMC’s quantitative easing threshold of 6.5 percent in perspective. The Fed does not expect the U.S. economy to reach that point until 2015, meaning that the purchases of mortgage-backed and long-term securities each month should continue for the foreseeable future. Meanwhile, inflationary pressures are expected to remain under control and within the Fed’s 2 percent or less target.
Chad Moutray is chief economist, National Association of Manufacturers.
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