The Fed left interest rates at zero and its asset purchase program unchanged at US$85 bn/month (of which $40 bn is MBS debt and $45bn is long-term Treasuries). It also reiterated that "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored." The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Fed firmed up somewhat its stance on keeping up the asset purchases “until” the outlook for the labour market has improved substantially. Note that in the prior statement, the Fed said that it would continue its purchases “if” the labour market does not improve substantially.
Esther George was again the only dissenter, concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances.
Explaining its decision to maintain its stance, the Fed acknowledged a return to moderate economic growth but continues to see downside risks to the economic outlook. The sequester is also acknowledged with the Fed stating that “fiscal policy has become somewhat more restrictive”.
Fed’s new projections:
The central tendency forecast for GDP growth (Q4/Q4) is now 2.3-2.8% in 2013 (versus 2.3-3.0% in its December update), 2.9-3.4% for 2014 (3.0-3.5% previously) and 2.9-3.7% for 2015 (3.0-3.7% previously). Despite the growth downgrades, the central tendency projections for the unemployment rate were lowered: 7.3-7.5% for 2013 (7.4-7.7% previously), 6.7-7.0% for 2014 (6.8-7.3% previously) and 6.0-6.5% for 2015 (6.0-6.6% previously). The projections show the jobless rate remaining above the 6.5% threshold for at least the next two years. Inflation forecasts for 2013 have been lowered a bit, but remain close to the Fed's 2% target and well below the 2.5% threshold through the projection horizon.
While there's no information about voting and non-voting members' views, the FOMC presented information about how participants feel about the pace of policy firming going forward. Fifteen members see rates remaining below 1% by 2014 (same as last December). FOMC members view that the fed funds rate should be in the 3-4.5% range over the longer run, with the majority continuing to see the fed funds in the 4.0-4.5% range
Fed Chairman Bernanke’s press conference
A broad range of topics were discussed from “too big to fail” to inflation targeting. In regards to QE, the Chairman pointed out that it was difficult to provide quantitative thresholds that could help market participants judge when and at what pace the asset purchase program could be scaled down. Evaluating the potential costs of the program added to the complexity of providing numerical guidance. However, since the pace of the purchases will be revised and adjusted as the labour market will improve, financial markets should be able to adjust gradually to the evolving situation according to Chairman Bernanke. He said the FOMC will use a variety of metrics to measure how successful monetary policy is in achieving its objectives. As far as the stock market is concerned, he suggested that current valuation does not appear to be out of historical norm. Contrary to what many had expected, nothing was said in regards to when and how the Fed plans to bring back the size and composition of its portfolio in line with historical norms. The current situation in Cyprus was not perceived as a being a threat to the U.S.
Bottom line:
There was little change in the Fed’s statement or economic projections today. The improving economic backdrop notwithstanding, the FOMC reaffirmed its asset purchase program. This is the right thing to do at this juncture. While GDP growth will bounce back sharply in Q1, the outlook for the subsequent months (i.e. 2013 Q2) is less upbeat due to the likely inventory drawdown and the more restrictive nature of fiscal policy. We still think that growth in the second half of 2013 should return to above 2%, an outcome that depends on private sector hiring holding up. All told, the Fed’s message today remains friendly to risk assets.
To Read the Entire Report Please Click on the pdf File Below.
Esther George was again the only dissenter, concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances.
Explaining its decision to maintain its stance, the Fed acknowledged a return to moderate economic growth but continues to see downside risks to the economic outlook. The sequester is also acknowledged with the Fed stating that “fiscal policy has become somewhat more restrictive”.
Fed’s new projections:
The central tendency forecast for GDP growth (Q4/Q4) is now 2.3-2.8% in 2013 (versus 2.3-3.0% in its December update), 2.9-3.4% for 2014 (3.0-3.5% previously) and 2.9-3.7% for 2015 (3.0-3.7% previously). Despite the growth downgrades, the central tendency projections for the unemployment rate were lowered: 7.3-7.5% for 2013 (7.4-7.7% previously), 6.7-7.0% for 2014 (6.8-7.3% previously) and 6.0-6.5% for 2015 (6.0-6.6% previously). The projections show the jobless rate remaining above the 6.5% threshold for at least the next two years. Inflation forecasts for 2013 have been lowered a bit, but remain close to the Fed's 2% target and well below the 2.5% threshold through the projection horizon.
While there's no information about voting and non-voting members' views, the FOMC presented information about how participants feel about the pace of policy firming going forward. Fifteen members see rates remaining below 1% by 2014 (same as last December). FOMC members view that the fed funds rate should be in the 3-4.5% range over the longer run, with the majority continuing to see the fed funds in the 4.0-4.5% range
Fed Chairman Bernanke’s press conference
A broad range of topics were discussed from “too big to fail” to inflation targeting. In regards to QE, the Chairman pointed out that it was difficult to provide quantitative thresholds that could help market participants judge when and at what pace the asset purchase program could be scaled down. Evaluating the potential costs of the program added to the complexity of providing numerical guidance. However, since the pace of the purchases will be revised and adjusted as the labour market will improve, financial markets should be able to adjust gradually to the evolving situation according to Chairman Bernanke. He said the FOMC will use a variety of metrics to measure how successful monetary policy is in achieving its objectives. As far as the stock market is concerned, he suggested that current valuation does not appear to be out of historical norm. Contrary to what many had expected, nothing was said in regards to when and how the Fed plans to bring back the size and composition of its portfolio in line with historical norms. The current situation in Cyprus was not perceived as a being a threat to the U.S.
Bottom line:
There was little change in the Fed’s statement or economic projections today. The improving economic backdrop notwithstanding, the FOMC reaffirmed its asset purchase program. This is the right thing to do at this juncture. While GDP growth will bounce back sharply in Q1, the outlook for the subsequent months (i.e. 2013 Q2) is less upbeat due to the likely inventory drawdown and the more restrictive nature of fiscal policy. We still think that growth in the second half of 2013 should return to above 2%, an outcome that depends on private sector hiring holding up. All told, the Fed’s message today remains friendly to risk assets.
To Read the Entire Report Please Click on the pdf File Below.