#newwest US FOMC holds fed funds steady and ends asset purchase program Today, the Federal Open Market Committee (FOMC) met expectations and announced the end of its asset purchase program. The Fed will continue to reinvest principal payments from its current holdings of agency debt, agency mortgage-backed securities (MBS), and US Treasuries that, given the large size of the Fed’s portfolio, it expects will “help maintain accommodative financial conditions.” No change was made to the fed funds target range of 0.00% to 0.25%, and the Fed also maintained its forward guidance that the fed funds rate will likely be held in its current range “for a considerable time following the end of its asset purchase program this month.” The statement added that this was “especially” true if inflation continued to run below the 2% longer-term goal, and longer-term expectations stayed anchored. The statement also reiterated that economic conditions may warrant keeping the fed funds target “below levels the Committee views as normal in the long run,” even after the unemployment rate and inflation have reached “mandate-consistent levels.” Only one member disputed today’s action. Fed committee member Kocherlakota pointed to the recent sluggish inflation performance and decline in inflation expectations as reasons to continue the asset purchase program and keep the target steady “at least until the one-to-year ahead inflation outlook has returned to 2%.” The Committee characterized inflation as “running below the Committee’s longer-term objective” and pointed to market-based measures of inflation expectations as having “declined somewhat.” With that said, it still deemed that survey-based measures show longer-term expectations have remained stable. Furthermore, although the Fed acknowledged that lower energy prices would likely hold down inflation in the near term, it reiterated that the likelihood of inflation running persistently below the 2% target “has diminished somewhat since early this year.” The economy was described as growing at a moderate pace with consumer spending and business investment advancing. The Fed still views housing market activity as “slow.” Labour market conditions conversely “improved somewhat further” as indicated by increased employment and the decline in the unemployment rate. In addition, the Fed stated that the underutilization of labour resources as indicated by a wider range of labour market indicators is “gradually diminishing.” This was a significant change from September’s statement that this indicator suggested “significant underutilization” was persisting. Today, the Fed started down the long road toward policy normalization that by its own reckoning will be a very long one. In our view, the ending of the QE III program signals the continued improvement in policymakers’ confidence that the US economy is growing at a sufficient pace to ensure that both the unemployment rate and inflation will reach their mandated levels in the longer term. The statement also indicated a willingness by the Fed to move sooner on raising the policy rate than is currently expected if the data were to show that both employment and inflation are reaching the targets more quickly. It added that if these indicators fail to meet expectations, then a policy rate increase would commensurately be delayed. By maintaining its forward guidance, policymakers are conveying that they anticipate rate increases will be gradual with the endpoint being lower that what was historically considered to be neutral. To that end, today’s statement is consistent with our assumption that there will not be any movement in the fed funds target until the middle of 2015; at which time, the economy should have been growing at an above-potential pace and the inflation and unemployment rates should be sufficiently close to the Fed’s target to alleviate any concern that the economy cannot withstand a more aggressive tightening in monetary policy.
Posted on: Wed, 29 Oct 2014 20:59:22 +0000
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