Summary:
- The Federal Reserve cuts the QE program another $10 billion a month to $35 billion a month in asset purchases
- The inflation target is raised a bit higher to 1.5 to 1.7 percent
- GDP growth rate is slashed to 2.1 to 2.8 percent
The Federal Reserve (Fed) is stuck to the course and continued to reduce its massive bond buying program. They held rates near zero and talked, amongst themselves, its conflicting signals to the markets and economy.
The one thing the Fed did do, which was different from its usual meeting, was to slash its economic outlook. The adjusted their growth outlook for gross domestic product (GDP) growth for the year from 2.8 percent to three percent to 2.1 to 2.8 percent. If you recall, Q1 GDP contracted one percent. They also lowered their unemployment numbers from 6.1 percent to 6.3 percent. They had expected six to 6.1 percent. In other words, we have a new inflation target. Inflation expectations stayed virtually the same as it was adjusted from 1.5 to 1.6 percent to 1.5 to 1.7 percent.
The higher adjustment to inflation does not help the Fed’s credibility.
The Federal Open Market Committee (FOMC) maintained its accommodative approach as they cut its QE program another $10 billion per month from $45 to $35 billion a month in asset purchases. They feel the economy has rebounded over the last few months as the labor market conditions have strengthened. Its language remained steady here as they still feel unemployment remains a bit elevated.
We are expecting them to keep rates near zero as they cut its QE program, so there was no surprise here. Even though there was a lot of discussion regarding inflation, especially how it was effecting the consumer in the core CPI at the gas pumps and grocery stores, the Fed barely mentioned this concern. The thinking here is that they are willing to let inflation run up as long as it helps the labor market and brings down the unemployment rate. Especially since it is still well below the target rate. Therefore, raising rates is not an investor concern at this time. The Fed also does not want to see the unemployment or inflation rates run away. So they are playing a delicate balance game as they are looking for gradual increases.
The Fed’s moves did not really impact the markets overnight. Why? The statement afterwards was a muted response to what is going on and certainly not a game changer on the longer term view. The only thing that was not normal was the change to economic projections. The last time they changed projections, in March, the market reaction was the same, muted.