Surprising the market, the Federal Reserve Board chose not to “taper” (or reduce) the size of its asset purchases at its latest Federal Open Market Committee (FOMC) meeting. In an effort to stimulate the economy, the Fed has been purchasing $85 billion in mortgage-backed and long-term securities each month. Since the summer, Chairman Ben Bernanke and others had telegraphed the intent of the FOMC to begin winding down its asset purchases, with all buying ending by mid-2014. The Fed’s balance sheet has risen from less than $1 trillion before the financial crisis to over $3.6 trillion today, and counting. With the FOMC opting not to taper at this meeting, the speculation will now build for upcoming meetings and more than likely before December.
Regardless of when the taper takes place, manufacturers in the most recent NAM/IndustryWeek survey expressed a moderate degree of concern about the Fed’s exit strategy from its holdings, rating it a 6.0 on average on a scale from 1 to 10 (where 1 is not worried and 10 is extremely worried). In general, respondents to the survey were concerned about the long-term health of the country, with their views about monetary policy and the Fed’s exit strategy not much different than their worry about policymakers’ inability to tackle the deficit and debt challenges.
Indeed, the political stalemate in Washington over funding the government might have played an indirect hand in this monetary policy action. It is possible that the Fed wanted to keep its current policies in place until we get past the debates over the FY 2014 budget and to lift the nation’s debt ceiling.
Specifically, the Fed notes some improvements in the economy since its last statement, but it also says that “fiscal policy is restraining economic growth.” It addressing why it did not ease its asset purchases, the FOMC statement states:
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.
The FOMC will gauge future actions on data that come in. They write:
In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
This means that the Fed will continue to have a “highly accommodative” monetary policy for the foreseeable future, even after tapering begins. The Fed will continue to maintain its goal of achieving longer-term inflation of 2 percent or less, and they plan to have an “easy” money stance until the unemployment rate hits 6.5 percent.
On that note, the Federal Reserve also lowered its economic projections marginally this year and next. The Fed now expects real GDP to grow between 2.0 and 2.3 percent, down from 2.3 to 2.6 percent three months ago. It forecasts growth of 2.9 to 3.1 percent in 2014. The unemployment rate should fall to 7.1 percent this year, with the possibility of hitting 6.5 percent by the end of 2014. In addition, core inflation is anticipated to stay below 2 percent over the course of the next two to three years.
As with previous statements, Esther L. George, the President of the Kansas City Federal Reserve Bank, was the lone dissenter. 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.
Chad Moutray is the chief economist, National Association of Manufacturers.