There were no surprises from the Fed this morning. Asset purchases were trimmed again and there were only minor changes to the economic assessment. Forward guidance was unchanged.
The pace of monthly asset purchases was
trimmed from $25 billion per month to $15 billion with an indication the
Committee will end the program at the October meeting. That fits with our expectations so no
There was some market speculation the
Committee’s forward guidance would change.
In the end they continued to signal there will be a “considerable time” before
the Fed funds target rate is changed following the end of the asset purchase
program. In our view a change to a more hawkish forward
guidance now seemed incongruous with continued easing. But such a change is clearly getting closer: there
are now two dissenters in the ranks (Plosser and Fisher).
There was no significant change to the economic
assessment. The critical point is the
committee continues to believe there is “significant underutilization of labor
resources.” The inflation language was
tweaked from “inflation moved closer to target” last time to “inflation has
been running below target”. That’s a nod
to more recent inflation outcomes which has seen the annual rate of inflation
pull back from the spike higher earlier in the year which the Committee had
attributed to “noise”.
There were also no surprises in the economic
and interest rate projections (the infamous “dots”). The only change to the growth forecasts that
stood out for me was the reduction in the mid-point GDP growth forecast for
2015 which was lowered 0.3% to 2.8%. It
stood out largely because it’s been a long time since any of our US growth
projections have been more optimistic than the Feds – we expect 3.0% growth in
Interest rate projections were higher from 2015
onwards. I’m ok with that. It always seemed to me that once the
tightening starts, rate hikes would be more aggressive than the Committee was
indicating. Importantly the median
projection for the long run (neutral rate) was unchanged at 3.75%.