The Federal Reserve kept is “highly accommodative” monetary policies in place at its latest Federal Open Market Committee (FOMC) meeting. There had been some expectation that the Fed might “taper” or reduce the amount of asset purchases, but that did not happen with this statement. The Fed will continue to purchase $85 billion in mortgage-backed and long-term securities each month. With that said, the FOMC did leave the door open to possibly tapering next time by saying, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”
The Federal Reserve also revised its economic projections higher, particularly for the next two years. Its estimates for 2013 were mostly the same as estimated three months ago, with the current range being 2.3 percent to 2.6 percent. Next year, the forecast is for 3.0 percent to 3.5 percent growth, up from 2.9 percent to 3.4 percent, which was the estimate in March. The unemployment rate is expected to fall to as low as 7.2 percent in 2013, 6.5 percent in 2014, and 5.8 percent in 2015. At the same time, inflationary pressures have eased over the past few months. Core inflation should be around 1.2 percent to 1.3 percent this year, and it predicted to stay below 2.0 percent in the coming two years.
With these changes in the forecast in mind, the FOMC statement says the following about the current state of the economy:
“Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.”
By maintaining the current policies, the Fed will keep its current goals in place, which were originally announced at their December meeting. That means that quantitative easing will continue until the unemployment rate reaches 6.5 percent or until longer-term inflation consistently exceeds 2.5 percent. Even if tapering is announced at upcoming FOMC meetings, this will still be guiding principle until the Committee decides to change course. The statement says the following about ending these measures: “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
The other interesting aspect of the FOMC statement was the dissents. In past meetings this year, the lone dissenter was Esther L. George, the President of the Kansas City Federal Reserve Bank. She continues to worry about the long-run inflationary risks associated with such accommodative policies, and she voted no again this time based on those concerns.
She was joined this time with a dissent from James Bullard, the President of the St. Louis Federal Reserve Bank. His opposition was based on the fact that pricing pressures have lessened significantly in the past few months. The statement says that he “believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.” In doing so, he took the opposite viewpoint of Ms. George. In essence, he worries that disinflation, not inflation, is the current problem, meaning that the FOMC statement was dissented from both its “hawkish” and “dovish” wings.
Chad Moutray is the chief economist, National Association of Manufacturers.
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