As expected, the Federal Open Market Committee (FOMC) did not make any changes to its monetary policy at its October 29-30 meeting. The Federal Reserve will continue to purchase $85 billion in long-term and mortgage-backed securities each month, and its goal of maintaining “highly accommodative” policies will not be altered until the unemployment rate hits 6.5 percent and/or long-term inflation exceeds 2.5 percent. As such, this means that short-term interest rates will remain at or near zero percent throughout 2014, and perhaps into 2015.
The guessing game, of course, is when the FOMC will begin to taper its monthly purchases of long-term assets. After the surprise non-taper decision at its September meeting, the current thinking is that the level of purchases might start to move lower as soon as the December 15-16 FOMC meeting, but more than likely, tapering will not begin until after either the January 28-29 or March 18-19 meeting. Given the concern about the government shutdown’s impacts on growth in the decision not to taper at the September meeting, the Fed might opt to see how the next budget impasse might get resolved in early 2014 before its decides to act.
Fortunately, pricing pressures remains low, as we have seen in recent consumer and producer price data. Core inflation remains below 2.0 percent – the stated goal of the Federal Reserve. This allows the FOMC to attempt to stimulate higher growth, pursuit to its dual mandate of tackling both inflation and unemployment. While the Fed found that “economic activity has continued to expand at a moderate pace,” it wants to wait until it sees “more evidence that progress will be sustained before adjusting the pace of its purchases.” Indeed, unemployment remains high, and government spending continues to be a restraint on growth.
Once again, Esther L. George, the president of the Kansas City Federal Reserve Bank, was the lone dissenter to the FOMC’s actions. Ms. George is worried about long-term inflationary pressures that might stem from accommodative monetary policies, and she would prefer that the Fed begin to taper its purchases now rather than later.
Chad Moutray is the chief economist, National Association of Manufacturers.