The statement released following the Federal Open Market Committee’s (FOMC) meeting included no changes and no surprises. The assessment of economic conditions was largely the same: moderate expansion of economic activity, advancing household spending and business investment, a strengthening housing sector, and improving labor market conditions but an elevated unemployment rate. Inflation is running below target but inflation expectations remain stable. The language regarding fiscal policy was downgraded from “more restrictive” to “restraining economic growth.”
The policy implications were as unchanged: a continuation of the current highly accommodative monetary policy stance. The target range for the federal funds rate will remain at 0 to 25 basis points for at least as long as the unemployment rate is above 6.5%, inflation one to two years out is projected to be no higher than one half of one percentage point above the Fed’s 2.0% target, and longer-term inflation expectations remain well anchored. The asset purchases (QE3) will continue at the current pace of $45 billion per month in agency MBS and $40 billion in longer-term Treasury securities. The language on the size and duration of the purchases was expanded to include the possibility of an increase or reduction in the pace of the asset purchases.
While the meeting produced no changes in monetary policy, for readers of the FOMC tea leaves the new language regarding fiscal policy clearly blames the inability of Congress and the administration to reach a deal on a more deliberate fiscal path for undermining a more robust economic recovery. The new language on the pace of asset purchases opens the door for an increase when most of the focus has been on a reduction in scale and an endpoint for the purchases altogether.
Overall these developments reaffirm the Fed’s view that while the recovery is making some progress the risks remain to the downside.