The Federal Open Market Committee’s latest policy meeting generated few surprises. The FOMC maintained its forward guidance on the federal funds rate target, which is still not expected to start rising until 2015, and did not alter its asset purchases plans ($40 billion per month in agency mortgage-backed securities and $45 billion in longer-term Treasuries). However, in his press briefing, Bernanke indicated that the pace of asset purchases could be varied as progress is made toward the Fed’s goals or if the assessment of the benefits and potential costs of the program were to change. However, he added that any changes to the pace would be made infrequently.
For the last policy meeting of the quarter, Fed officials (the seven governors and 12 district bank presidents) submit forecasts of GDP growth, the unemployment rate, and inflation. They also project when conditions would warrant an increase in the federal funds target rate. In their latest assessment, Fed officials lowered (relative to the December forecast) their expectation for growth this year, but they also lowered their projection of the 4Q13 unemployment rate.
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In his press briefing, Chairman Bernanke said that the FOMC “remains concerned that restrictive fiscal policies may slow economic growth and job creation in the coming months.” As last week drew to a close, lawmakers were near an agreement on a Continuing Resolution to fund the government through the second half of the fiscal year (when the going gets tough, the tough head out on vacation – Congress will be out of session for the next two weeks). The CR did not remove the $85 billion sequester cuts slated for this year, but did shift them around a bit (no cuts for meat inspection and tuition for military service members, more modest cuts in some areas, and steeper cuts in others). Bernanke said that the Fed’s analysis was similar to that of the Congressional Budget Office, which estimates that the fiscal cliff deal (including the payroll tax increase), the sequester, and other cuts will reduce GDP growth this year by about 1.5 percentage points. Bernanke added that “monetary policy cannot offset a fiscal restraint of that magnitude.”
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In his press briefing, Bernanke stressed that the importance of the labor market in monetary policy. Recall that the FOMC has a qualitative threshold for it asset purchase program: “substantial improvement” in the labor market. The FOMC is unable to provide specific quantitative guidelines, according to the Fed Chairman, due to the complexity of the problem. Bernanke said that the Fed is looking for “sustained improvement” in a range of labor market indicators, including payrolls and the unemployment rate, but also the hiring rate, unemployment insurance claims, quit rates, wages rates, and so on. The recent strength in nonfarm payrolls has been encouraging, but the Fed wants to be sure that this is not just temporary improvement. The Fed is interested in the outlook, not just the current state of the labor market, and will try to gauge “whether there is sufficient momentum in the economy to provide demand for labor going forward.” Tighter fiscal policy and continued problems in Europe are likely to keep that momentum in check.
© Raymond James
