Tag: Federal Reserve Board

Federal Reserve Participants Focused on Slack in the Economy at their March FOMC Meeting

The Federal Reserve Board released the minutes of its March 18-19 Federal Open Market Committee (FOMC) meeting. While we already had the statement from this meeting, the minutes allow us to know the inner deliberations of the Committee. The participants debated, for instance, the degree to which there was “slack” in the labor market, with some feeling that the reduced unemployment rate masked continuing weaknesses (e.g., low participation rate, high rates of underemployment and part-time employment) while others felt that some of these weaknesses mirrored larger demographic trends.

FOMC members also spent some time focusing on the impact of global events on the U.S. economy.  The recent deceleration in real GDP growth in China “had already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth.” The participants also discussed the events of the Ukraine and the negative impact of possible geopolitical events.

One of the more controversial – in some circles – aspect of the March FOMC meeting was the dropping of the 6.5 percent target in its forward guidance. That target had been part of their guidance since the December 2012 FOMC meeting. There were discussions about replacing the 6.5 percent target with another number. (Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, dissented from the final statement and later suggested that he felt the target should have been 5.5 percent.) In the end, the majority of participants voted to approve the switch from a “quantitative” to a “qualitative” target, which would be data dependent but still provide the FOMC with flexibility to act when it needed to.

The FOMC also voted to continue tapering its long-term and mortgage-backed security purchases from $65 billion each month to $55 billion each month. The minutes go on to say the following: “Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings.”

In general, FOMC members wanted the public to know that it would maintain a highly accommodative stance on monetary policy for the foreseeable future. While tapering of long-term assets will continue at future meetings, short-term interest rates will stay near zero throughout 2014, and it is likely that they will not start to increase the federal funds rate until sometime in 2015.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Business Economists Anticipate 2.8 Percent Growth in Real GDP in 2014

Economists with the National Association for Business Economics (NABE) expect real GDP growth of 2.8 percent in 2014, up from 2.5 percent predicted three months ago. This is true despite weather-related softness in January and February, with economists anticipating 1.9 percent growth in the first (or current) quarter. Respondents to the NABE Outlook Survey also predict 3.2 percent output growth for 2015, suggesting the U.S. economy will continue to accelerate into next year.

This is good news for manufacturers. Industrial production is expected to increase 3.2 percent and 3.4 percent in 2014 and 2015, respectively. This is mostly consistent with the positive outlook noting in the latest NAM/IndustryWeek survey. In terms of auto production, light vehicle sales should rise from an average of 15.5 million annualized units in 2013 to 16.0 million and 16.5 million units in 2014 and 2015, respectively. Meanwhile, housing starts are anticipated to grow to 1.07 million and 1.3 million this year and next.

A number of special questions focused on the Federal Reserve Board and monetary policy. Eighty percent of business economists expect the Fed’s quantitative easing program, with 57 percent anticipating the end of long-term asset purchases in the fourth quarter of 2014. In terms of short-term interest rates, the responses were more scattered, but more than half predict the federal funds rate to start to increase in 2015. Overall inflationary pressures are expected to stay under or at the Fed’s 2-percent goal, with consumer prices up 1.7 percent and 2.0 percent in 2014 and 2015, respectively.

Those taking the survey were asked about the biggest threats to the economic expansion, and the top choice was rising interest rates, cited by 27 percent of responses. This was closely followed by the regulatory environment (14 percent), financial instability in emerging markets (14 percent), and federal fiscal gridlock (11 percent).

Labor market growth has slightly decelerated since the last survey, as we have seen in recent jobs numbers. Nonfarm payroll growth should average 188,000 per month in 2014, down from the average of 197,000 in 2013. In the December survey, respondents had predicted 197,000 for this year. In 2015, business economists predict an average of 205,000 additional nonfarm employees each month.

Chad Moutray is the chief economist, National Association of Manufacturers. Note that he was one of the panelists for the NABE Outlook Survey.

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Monday Economic Report – March 24, 2014

Here is the summary for this week’s Monday Economic Report:

For much of the past month, people have been questioning how much of the recent softness in the manufacturing sector was due to weather and how much stemmed from other factors. The data released last week support the view that it was largely weather related, with numerous winter storms keeping shoppers from the stores and closing factories temporarily. Fortunately, manufacturing activity has rebounded in the latest reports. For instance, manufacturing production increased 0.8 percent in February, nearly offsetting January’s 0.9 percent decline, with capacity utilization for the sector rising from 75.9 percent to 76.4 percent. Similar rebounds were seen in the March surveys from the New York and Philadelphia Federal Reserve Banks, and more importantly, manufacturers continue to be mostly upbeat about new orders and shipments over the next six months.

In its monetary policy statement, the Federal Reserve Board’s Federal Open Market Committee (FOMC) acknowledged the negative effects of “adverse weather conditions” on recent activity. It also provided the following evaluation of the current economic environment:

Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

The biggest news from the FOMC’s statement was the change in its forward guidance, as expected, to no longer mention an unemployment rate target. Since its December 2012 meeting, the FOMC has said it would pursue a highly accommodative monetary policy until the unemployment rate hit 6.5 percent and/or long-term inflation consistently exceeded 2.0 percent. With unemployment falling, this put the Federal Reserve in a predicament because job growth continues to be a challenge, particularly for the long-term unemployed, and progress in the unemployment rate fails to acknowledge loforw participation rates and underemployment that exists in the labor market. For this reason, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota opposed the change in the Fed’s guidance, and he subsequently said that he wanted a 5.5 percent unemployment rate target.

In the end, however, short-term interest rates cannot hover around zero percent forever, particularly with the U.S. economy improving. The Federal Reserve now forecasts real GDP growth in 2014 of 2.8 percent to 3.0 percent, with the unemployment rate falling to 6.1 percent by year’s end. The FOMC continued to taper its long-term asset purchases, down from $65 billion each month to $55 billion, and short-term interest rates are now expected to start rising sometime in 2015. (This is true even with new Federal Reserve Chair Janet Yellen’s suggestion that rates might begin to increase around six months after quantitative easing ends, a comment that spooked markets on Wednesday.)

Fortunately for the Federal Reserve, inflationary pressures remain minimal, allowing the FOMC to continue its stimulative measures for now. Consumer prices rose 0.1 percent in February, with core inflation increasing 1.6 percent over the past 12 months. Of course, higher interest rates could negatively impact spending, particularly for large consumer items and for business investments.

Along these lines, housing starts have stabilized a little, up from 905,000 annualized units in January to 907,000 in February, but still remain somewhat weak. On the positive side, housing permits—a proxy of future activity—exceeded 1 million for the first time since November, largely on gains in multifamily residential construction. Single-family permitting remained soft, however, and homebuilder sentiment continued to be down from where it was just a few months ago. In addition to weather challenges, National Association of Home Builders (NAHB) Chief Economist David Crowe attributes the current weakness to “a shortage of buildable lots and skilled workers, rising materials prices and an extremely low inventory of new homes for sale.”

Today, we will get March Markit Flash Purchasing Managers’ Index (PMI) data for the United States, China and Eurozone. In particular, economists will be looking to see if Chinese manufacturing activity continues to decelerate and if the slight easing in February’s data was a one-month phenomenon. (For more on international trends, see the latest Global Manufacturing Economic Update, which was released on Friday.) Other highlights this week include updates on consumer confidence, durable goods orders and shipments, GDP, manufacturing surveys from the Kansas City and Richmond Federal Reserve Banks, personal income and spending and state employment.

Chad Moutray is the chief economist, National Association of Manufacturers.

fed funds rate - mar2014

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The Federal Reserve Continued Tapering, Changing its Forward Guidance to be More Vague

The Federal Reserve Board said that it would continue tapering its long-term asset purchases. As expected, the Federal Open Market Committee (FOMC) voted to reduce its monthly purchases of mortgage-backed and long-term securities from $65 billion to $55 billion, continuing to lower its bond-buying initiative by $10 billion with each meeting. These reductions began in December, when the Fed was still buying $85 billion in assets each month. Conventional wisdom holds that the Fed’s quantitative easing program will end by the third quarter of 2014.

The other major decision involved the 6.5 percent unemployment rate target that has been in the FOMC statement since December 2012. With the unemployment rate approaching 6.5 percent, it was widely anticipated that the Fed would change its forward guidance to stop mentioning an unemployment rate target altogether. In essence, the Fed would switch from “quantitative” to “qualitative” guidance. In its statement, the Fed said that it would continue to maintain its highly accommodative stance for some time, with the FOMC’s new goals somewhat vague in terms of data goals. It says:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

While the January FOMC minutes hinted that short-term rates might start to rise by year’s end if the economy grows sufficiently, economists have largely forecasted that the Fed funds rate would begin to increase gradually sometime in 2015. With that said, Federal Reserve Chair Janet Yellen suggested in her first press conference that short-term interest rates might rise around six months after quantitative easing ends. Financial markets interpreted this to be sooner than expected, sending equity markets lower.

There was one dissenter to the FOMC’s actions this time. Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, did not support dropping the unemployment rate target from the Fed’s forward guidance. He feels that unemployment remains elevated, and the Fed should continue its stimulative policies until the unemployment rate falls further. Specifically, the statement says that he felt that it “weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”

In terms of economic forecasts, the Fed slightly lowered its predictions for growth in 2014. It now expects real GDP to increase between 2.8 and 3.0 percent, down from the 2.8 to 3.2 percent range stated three months ago. Weather-related softness has likely had a negative impact on these forecasts, particularly for the first quarter. On the other hand, employment was somewhat better, with the unemployment rate falling to as low as 6.1 percent in 2014 and 5.6 percent in 2015. Pricing pressures were expected to be minimal, staying below the Fed’s threshold of 2 percent for the next couple years. This year, core inflation should increase between 1.4 percent and 1.6 percent at the annual rate.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Monday Economic Report – March 17, 2014

Here is the summary for this week’s Monday Economic Report:

Recent events around the world remind us that the global economic and political environment remains uncertain. Manufacturers have had to cope with weather-related softness over the past few months, worries about the geopolitical situation and slowing growth rates in some of our largest trading partners, specifically China. Despite these challenges, they continue to be mostly upbeat about future activity.

The latest NAM/IndustryWeek Survey of Manufacturers found that 86.1 percent of respondents were positive about their company’s outlook, up from 78.1 percent three months ago, with increased expectations for sales, exports, employment and capital spending. Still, smaller manufacturers were less positive, particularly in their investment plans. The top challenges were the business climate and rising health care and insurance costs, with respondents noting the need for comprehensive tax reform and expressing concern about ever-increasing regulatory burdens.

Government regulations were also cited as the most important problem in the latest National Federation of Independent Business (NFIB) survey of small business owners. It was one of two sentiment surveys released last week showing reduced confidence. NFIB’s Small Business Optimism Index fell sharply, down from 94.1 in January to 91.4 in February. The percentage saying it was a good time to expand declined, with weak sales and earnings expectations. Likewise, preliminary March consumer confidence numbers from the University of Michigan and Thomson Reuters were also lower, perhaps reflecting concerns about job and income growth.

On the positive side, retail sales began to rebound in February, up 0.3 percent. While this was not enough to make up for the weather-induced declines of December and January, it did suggest there were possible “green shoots” on the consumer spending front, with Americans starting to return to the stores. For instance, the auto sector saw modest sales gains in February, a trend seen in other hard-hit sectors as well.

This week, much of the focus will be on the Federal Reserve Board, with a new monetary policy statement from the Federal Open Market Committee (FOMC) coming out on Wednesday. While hiring remains soft (as the latest job openings numbers show), the unemployment rate is likely to reach the 6.5 percent threshold in the next month or two. Therefore, the expectation is that the FOMC will change its forward guidance on short-term interest rates to omit mention of an unemployment rate target. Fortunately, pricing pressures remain minimal, allowing the Federal Reserve to continue to pursue highly accommodative policies, even as it continues to taper its long-term asset purchases. Look for the FOMC to reduce its purchases from $65 billion each month in long-term and mortgage-backed securities to $55 billion.

It will be a busy week for economic releases, including new data on industrial production and housing starts. Manufacturing output should rebound somewhat, even as bad weather dampened activity once again. Similar findings are expected in the New York and Philadelphia Federal Reserve Bank manufacturing surveys. Meanwhile, housing starts should also pick up slightly, but new residential activity will remain subpar relative to a few months ago. Still, we remain upbeat about the housing market for 2014 as a whole. Other highlights this week include new measures for consumer prices, homebuilder confidence and leading indicators.

Chad Moutray is the chief economist, National Association of Manufacturers.

nam industry week - mar2014

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Higher Utility Bills Due to Colder Weather Push the Consumer Price Index Up Marginally

The Bureau of Labor Statistics reported that consumer prices increased 0.1 percent in January, edging marginally higher for the third straight month. The largest increase in each of the last two months has been with energy goods (up 1.6 percent and 0.6 percent, respectively), but with a difference this time around. In December, higher energy prices stemmed largely from increases in gasoline, but the gains in January were primarily from an acceleration in household utility bills. A similar finding was noted in yesterday’s producer price index, with colder weather pushing up the cost of electricity and piped-in natural gas.

In contrast, food prices rose just 0.1 percent in January, both for food purchased for the home and at restaurants. Increased prices for baked goods, cereals, dairy products, meats and poultry were offset by declining costs for fruits and vegetables.

Outside of food and energy, core inflation was also up 0.1 percent. There were increases in the cost of medical care, housing, and transportation, but there were somewhat offset by declining prices for apparel and new and used vehicles. On a year-over-year basis, core inflation rose 1.6 percent between January 2013 and January 2014. While core prices have accelerated from October’s 0.9 percent annual pace, overall pricing growth remains mostly acceptable. For instance, it remains below the Federal Reserve’s stated goal of 2 percent, which it has done every month for 12 straight months.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Monday Economic Report – December 23, 2013

Here is the summary for this week’s Monday Economic Report:

The U.S. economy grew a surprisingly strong 4.1 percent in the third quarter, according to the most recent revision of real GDP from the Bureau of Economic Analysis. While inventory replenishment accounted for a large portion of this increase, consumer and business spending continue to boost overall economic activity. I expect real GDP growth of 2.5 percent in the current (fourth) quarter, essentially the same pace for 2013 as a whole. For 2014, the economy should expand by 3.0 percent, which would be the first year since 2005 that the annual average would grow by that amount.

A number of data sources supported the view that economic activity has begun to improve, continuing the accelerating pace in the second half of 2013. For instance, manufacturing production rose 0.6 percent in November and 2.9 percent year-over-year. On the latter figure, the annual pace has made definite progress since July’s 1.2 percent pace. The Manufacturers Alliance for Productivity and Innovation (MAPI) predicts that industrial production will accelerate to 3.1 percent in 2014 and perhaps 4.1 percent in 2015.

A number of regional surveys show manufacturers tend to be mostly upbeat about new orders and output in the coming months. This includes the latest reports from the Kansas City, New York and Philadelphia Federal Reserve Banks. The more optimistic future assessment was true despite notable weaknesses in the current environment, particularly in the Kansas City and New York surveys. Similarly, the latest Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) suggested that output growth remained near the more robust pace at the beginning of 2012, with modest growth overall. Meanwhile, we continue to see stabilization in the Chinese and European economies. These releases show hiring growth remains modest at best.

The housing market also bounced back strongly in November. New housing starts soared to 1.09 million units at the annual rate, the highest level since February 2008. Both single-family and multifamily starts were up sharply for the month, and overall, new residential construction has increased nearly 30 percent over the past 12 months. Furthermore, new housing permits have also exceeded 1 million units for two straight months, which should bode well for future activity. The gains in residential activity have also helped to lift homebuilder confidence once more, according to the National Association of Home Builders and Wells Fargo. I expect that housing will continue to be one of the bright spots in the economy, particularly as borrowing costs remain at historic lows and the “sticker shock” of higher rates wears off.

The improvements in the economy have led the Federal Reserve to finally start to pare back its latest quantitative easing program. At the conclusion of its December Federal Open Market Committee (FOMC) meeting, the Federal Reserve decided to begin tapering its purchases of long-term and mortgage-backed securities, down from $85 billion each month to $75 billion starting in January. The expectation is that this will set in motion future reductions in these purchases, with all buying ending sometime in mid-2014. However, the Federal Reserve will still be pursuing a “highly accommodative” monetary policy, with short-term interest rates near zero for the foreseeable future. In his press conference afterward, Federal Reserve Board Chairman Ben Bernanke suggested short-term rates might not move up until after the unemployment rate hits 6.5 percent, which it is not likely to do until the end of 2014. He made a similar comment in his speech to the National Economists Club in November. Fortunately, pricing pressures remain quite low for now, providing the Federal Reserve with more time to pursue its stimulative measures.

This week will be a shortened one due to the Christmas holiday, but there will still be some key data releases. Later this morning, we will get the latest reads on personal spending and consumer confidence, both of great importance in terms of holiday spending. Sentiment had improved in the initial estimate from the University of Michigan and Thomson Reuters, rebounding from the dips in perceptions seen during the government shutdown. This should help retail sales, which have grown modestly of late. We will also learn more about the health of the manufacturing sector with a new report on durable goods sales and the latest survey from the Richmond Federal Reserve Bank.

Chad Moutray is the chief economist, National Association of Manufacturers. Due to the holidays, there will be no report issued during the week of December 30. The schedule will resume on Monday, January 6.

housing starts and permits - dec2013

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Federal Reserve Reduces its Asset Purchases by $10 Billion to $75 Billion Each Month

The Federal Open Market Committee (FOMC) of the Federal Reserve has agreed to start “tapering” (or reducing) its asset purchases at its latest meeting. The FOMC had been purchasing $45 billion in long-term and $40 billion in mortgage-backed securities each month in an effort to boost economic growth. In its statement, the Fed has announced that it will scale back its purchases of type of security by $5 billion each, or by $10 billion in total.

In essence, the Fed will continue to purchase $75 billion each month from this point forward, making changes where needed. In its statement, the Fed writes:

“The Committee will continue to monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

The Fed is expected to completely end it asset purchases by mid-2014, stopping the latest iteration of “quantitative easing.” With that said, the FOMC statement cautions that future actions are not on a “preset course.” In saying this, the Fed is once again saying that Fed policy decisions will continue to be dependent on data, and future tapering will hinge on continued improvements in the economy.

One thing to keep in mind is that the Fed remains committed to highly accommodative monetary policies, even with this decision on long-term and mortgage-backed asset purchases. The Fed has said that it will continue to maintain its easier monetary policies until the unemployment rate hits 6.5 percent and/or long-term inflationary pressures exceed 2.5 percent. This suggests that short-term interest rates will remain near zero percent throughout much of 2014, and perhaps into 2015.

The Fed also released the economic projections that were used in making its FOMC decision. In general, these forecasts were somewhat similar for real GDP, but they predict better gains in the labor market. FOMC participants predict that real GDP will increase by 2.8 to 3.2 percent in 2014, which was not much different from the 2.9 to 3.1 percent range seen in the September projection. Referring to price stability, the Fed sees core inflation remaining below its target of 2 percent or less through 2016.

On the employment front, the unemployment rate is expected to improve to 6.3 to 6.6 percent by the end of 2014, a small improvement from the 6.4 to 6.8 percent range seen three months ago. Indeed, the FOMC statement refers to improvements in the labor market, even as they remain higher than we might prefer. The Fed does not see the economy reaching 6 percent unemployment or less until 2015 – a rate that some might see as “full employment.”

In making its decision to start tapering, the FOMC dissenter switched from an inflationary “hawk” to an inflationary “dove.” Eric S. Rosengren, the president of the Boston Federal Reserve Bank, was the lone dissenter this time around. He voted against tapering because he felt that it was “premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.” He felt that “the unemployment rate was still elevated and the inflation rate” was still quite low. Meanwhile, Esther L. George, the president of the Kansas City Fed, who had dissented in each of the past few statements and a well-known inflation hawk, voted for the rest of the FOMC to approve the actions taken.

Note that the make-up of the FOMC will change in 2014. James Bullard (St. Louis), Charles L. Evans (Chicago), Esther L. George (Kansas City), and Eric S. Rosengren (Boston) will rotate off of the committee as voting members, but they will still participate in the overall discussion. The new voting members for 2014 will be Richard W. Fisher (Dallas), Narayana Kocherlakota (Minneapolis), Sandra Pianalto (Cleveland), and Charles I. Plosser (Philadelphia). Fisher and Plosser are known inflation hawks.

In addition, Chairman Ben Bernanke’s term expires on January 31, and he is expected to be replaced by Vice Chairman Janet Yellen, assuming she is confirmed.  If Janet Yellen is the new Chair, President Obama is expected to nominate Stanley Fischer, the previous head of the Bank of Israel and the former chief economist at the World Bank, as the new Vice Chair.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Consumer Price Index Was Unchanged in November

The Bureau of Labor Statistics said that consumer prices were unchanged in November. Once again, lower petroleum prices helped to ease inflationary pressures. Gasoline prices have fallen 2.9 percent and 1.6 percent in October and November, respectively. Indeed, the price of West Texas intermediate crude fell from an average of $106.29 per barrel in September to $100.54 and $93.86 per barrel in October and November, respectively. Total energy costs for consumers declined 1.0 percent in November.

The increase in energy prices was offset by modest gains in food and other costs. Food prices rose 0.1 percent in November, boosted by higher dairy prices and the cost of food away from home. At the same time, there were lower prices for cereals and bakery products, fruits and vegetables, meats and eggs, and nonalcoholic beverages.

Outside of food and energy, the largest monthly price increases were seen for shelter expenses and airline fares. In contrast, prices for apparel, hospital services, household furnishings and supplies, new vehicles, and tobacco and smoking products were lower in November.

Overall, consumer prices have risen by just 1.2 percent over the past 12 months. Core inflation – which excludes food and energy costs – has grown by 1.7 percent year-over-year. This suggests that pricing pressures remain quite modest, with core inflation running below the Federal Reserve’s stated target of 2 percent. In fact, core inflation has not exceeded 2 percent since July 2012.

The Federal Open Market Committee (FOMC) meeting begins today, with a decision on monetary policy coming tomorrow afternoon. There is some expectation that the Fed will announce a decision to start “tapering” (or reducing) its asset purchases at this meeting. I suspect that the FOMC will instead push this decision back to either the January 28–29 or March 18–19 meeting.

Improvements in the macroeconomy should serve as an incentive to begin to scale back its asset purchases, but very low current inflationary pressures give the FOMC the leeway to stand pat if it wants to wait and see more evidence of growth before acting. Either way, financial markets have once again begun pricing in a possible taper, with the average yield on 10-year Treasury notes rising from a recent low of 2.51 percent on October 23 to a close of 2.88 percent yesterday.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Fed Minutes: Highly Accommodative Policies to Continue, Tapering Could Start “In Coming Months”

The Federal Reserve released the minutes to the October 29-30 Federal Open Market Committee (FOMC) meeting, providing an inside look at the internal deliberations. As noted earlier, the FOMC made no changes to its monetary policy actions at the October meeting, continuing to purchase $85 billion in long-term and mortgage-backed securities each month. It also affirmed its goal of maintaining “highly accommodative” policies 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 near zero percent throughout 2014, and perhaps into 2015.

Over the summer, the Fed had been expected to begin “tapering” (or reducing) its asset purchases by year’s end, with it widely anticipated to start at the September 17-18 meeting. Instead, the FOMC chose not to taper at that meeting, surprising the market. In making its decision, the Fed cited the political stalemate in Washington and the possibility of a government shutdown. Beyond that, it also wrote:

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.

The Fed has since insisted that a tapering decision was not pre-ordained, with any action being data dependent. Nonetheless, the Fed was widely criticized for miscommunicating its intentions, something that Chairman Ben Bernanke addressed at last night’s National Economists Club annual meeting. The threat of reducing asset purchases had sent long-term interest rates sharply higher, which he said was “neither welcome nor warranted.” Moreover, he added, “This change in expectations did not correspond to any actual lessening in the FOMC’s commitment or intention to provide the high degree of monetary accommodation needed to meet its objectives….”

The Fed’s forward guidance was discussed in both the FOMC minutes and Bernanke’s speech. Specifically, Bernanke noted that that 6.5 percent unemployment rate target was a “threshold” and not a “trigger.” In other words, the FOMC would begin debating a wind-down to its accommodative policies once the unemployment reached 6.5 percent, but one should not assume that the fed funds rate will automatically go up just because the threshold was reached. The Fed minutes make a similar point, with a couple participants pushing for an even lower target unemployment rate.

In the end, the FOMC voted to keep its policies in place without changing its forward guidance. The issue of accommodation remains a controversial one in the public and within the FOMC, with inflation hawks worried about longer-term inflation worries from current actions. Esther L. George, the president of the Kansas City Fed, dissented from the Fed’s statement for that reason. The minutes did reiterate that tapering was to begin “in the coming months,” but that is not likely to occur until probably early next year. The next FOMC meeting is on December 15-16.

Regarding the economy, the FOMC members found that the impacts of the partial government shutdown were “temporary and limited,” with several of them worrying about “the possible economic effects of repeated fiscal impasses on business and consumer confidence.” They were also disappointed with the September jobs numbers. Yet, they were encouraged  by the recent pickup in manufacturing activity, singling out strength in auto sales. While the economic projections for the short-term were slightly lower, the outlook for 2014 and 2015 currently calls for growth to accelerate. In September, the Fed had estimated growth of 2.9 to 3.1 percent real GDP growth for next year.

Chad Moutray is the chief economist, National Association of Manufacturers. He is a former president and chairman of the National Economists Club, where Bernanke gave the Herbert Stein Memorial Lecture.

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