The Federal Reserve kept its existing monetary policies in place at its latest Federal Open Market Committee (FOMC) meeting. This was largely expected. With the policy positions unchanged, the focus instead was on the language that the Fed used to describe economic conditions. In particular, the Fed said that the U.S. economy is “expanding at a moderate pace,” but it added that “fiscal policy is restraining economic growth.”
This latter point is a reference to higher payroll taxes, across-the-board federal budget cuts, and the continuing debate over how to resolve our nation’s fiscal challenges. Given the limitations of fiscal policy right now and lack of action from Congress and the Administration, the FOMC has felt that it needs to act to stimulate growth pursuant to its dual mandate of tackling both inflation and unemployment. With pricing pressures under control for the time being, the Fed is free to pursue highly accommodating policies.
Specifically, 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.
The minutes of the last FOMC meeting in March led many to believe that some voting members were open to scaling back these purchases if economic conditions improved in the coming months; however, it is widely expected that these purchases will continue at least until year’s end, if not longer. Note that the Fed’s most recent economic projections do not have the unemployment rate reaching 6.5 percent until the beginning of 2015.
As with previous statements, 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.
Chad Moutray is chief economist, National Association of Manufacturers.