Today’s FOMC statement did not deliver the expected dovish tones. Speculation has risen in markets recently that the Fed would soon begin reducing the pace of asset purchases. The FOMC did nothing today to dispel that expectation, in fact Chairman Bernanke’s post meeting remarks said that policymakers expect to begin tapering asset purchases “later this year” and continue “in measured steps through the first half of next year, ending around mid-year. Our own view has been the Fed will begin tapering late this year at the earliest.
It’s important to note the policy outlook
is heavily contingent on economic conditions playing out as expected. Importantly, the Committee sees that downside
risks to the outlook for the economy and the labour markets having diminished
since the US autumn (when QE3 began). Bernanke
also stated the policy outlook was based on the unemployment rate moving down
to 7% by the middle of next year.
Latest Fed forecasts have scaled back their
GDP forecasts for this year, but they still imply stronger growth in the second
half of this year than we have seen in the first half. Growth forecast for next year were nudged
slightly higher. Inflation forecast were
lowered for this year (from the Statement: “partly reflecting transitory
influences”), but they note that longer-term inflation expectations have
remained stable. Inflation is expected
to rise next year. While much attention
is being paid to the GDP and unemployment rate forecasts, remember it’s the
FOMC’s inflation expectations that will ultimately determine the path for
It’s also important to remember that a
timetable for reducing quantitative easing is not as hawkish as a tightening in
policy. Interest rate increases are
still a long way off with the majority of FOMC participants not expecting a
rate hike until 2015.
Today’s Statement moves our expectations of
the start of the Fed tapering more firmly into later this year. But as with the Fed themselves, that is
contingent on the expected pick-up in GDP growth, continued declines in the
unemployment rate (through more jobs, not lower participation), and increased
confidence that inflation will start to head towards 2% over time. In that sense, the beginning of the Fed
reducing its asset purchase program is good news.