The statement following the April 24-25 meeting of the Federal Open Market Committee (FOMC) contained no surprises. The characterization of economic conditions differed little from the March statement: the labor market is improving but the unemployment rate remains elevated; household spending and business investment continue to advance; the housing sector remains depressed; inflation is in check. Economic growth will pick up, but the unemployment rate will decline gradually, while global financial market strains pose significant risk to the outlook, and increased oil and gasoline prices will affect inflation only temporarily.
Monetary policy will be maintained at the current highly accommodative stance: a rock bottom federal funds rate through late 2014, continuation of “operation twist” as well as agency debt, MBS and Treasury securities portfolio management practices.
The statement was accompanied by a summary of economic projections from meeting participants and their “assessment of appropriate monetary policy.” These are part of the Fed’s effort at increased transparency. The April projections strengthened GDP growth modestly in 2012 compared to the January projections, but weakened growth in 2013 and 2014. Projections of the unemployment rate were reduced by roughly 0.5 percentage points for 2012, with smaller reductions for 2013 and 2014. Projections of inflation were higher for 2012, but roughly unchanged for 2013 and 2014.
The assessments of appropriate monetary policy came in the form of charts showing the distribution of meeting participants’ views of when the federal funds rate should begin rising, and what the rate should be at the end of each year in the 2012 to 2014 outlook. Three participants viewed increasing the federal funds rate this year as appropriate, three more viewed the first increase in 2013 as appropriate. Seven participants identified 2014 as appropriate and the remaining 4 participants indicated 2015. This distribution represents a shift among participants to an earlier increase in the federal funds rate since January when 2 participants viewed 2016 as when monetary policy should begin tightening.
At the press conference following the meeting (more transparency) Chairman Bernanke fielded questions covering a range of economic issues, including the extent of structural vs. cyclical unemployment, US and Japanese asset bubble policy response comparisons, but most importantly the current and near term stance of monetary policy. Bernanke indicated that a strengthening economic recovery reduced the need for additional monetary stimulus (e.g., QE3), but maintained that the Federal Reserve stood ready and willing to provide additional stimulus should the economic recovery take a turn for the worse.
There has been some discussion about whether the increased communication from the Federal Reserve would enhance or confuse public and market understanding of the intent and direction of monetary policy. I think Chairman Bernanke’s press conferences, which are planned to be roughly quarterly, provide the clearest yet guidance on the Fed’s view of economic conditions and the appropriate stance of monetary policy.
A video is available at: http://www.federalreserve.gov/