The most significant development reported in today’s statement and Chairman Bernanke’s press conference following the two day meeting of the Federal Open Market Committee (FOMC) was the identification of explicit targets connecting improvement in the economy and the beginning of increases in the federal funds rate. Previous FOMC guidance had been that the funds rate would remain at its current low level until labor markets showed substantial and sustained improvement, at least through mid-2015. Today the FOMC changed that guidance pegging the first increase in the funds rate to not before the unemployment rate falls below 6.5%, conditional on inflation projections one to two years out not above 2.5%, and “well anchored” longer-term inflation expectations.
The practical effect of this change, as Bernanke stressed, is limited given that the central tendency of the economic projections provided by meeting participants have the unemployment rate falling to between 6.0% and 6.6% in 2015. The projections also anticipate an inflation rate in the range of 1.7% to 2.0% at that time, completely consistent with the earlier mid-2015 guidance. The projections anticipate growth in real GDP to be between 3.0% and 3.7%.
The FOMC also announced that “Operation Twist” will be replaced when it expires this year with a new program of purchases of longer-term Treasury securities but with no offsetting sales of short-term securities. The new purchases will start at $45 billion per month maintaining the current pace, and when combined with the continuing monthly purchases of $40 billion of agency mortgage backed securities are intended to provide the same level of support to the recovery. The committee repeated its intention to keep this level of accommodation in place as long as necessary with the usual caveats about the pace, composition and efficacy of the activities.