What to Look for in Tomorrow’s FOMC Statement

Here’s a look at the last FOMC policy statement and possible changes they may make. This is all just speculation on my part.

The policy statement has six paragraphs. The key tomorrow is the third paragraph which outlines the goals of the QE program.

FIRST PARAGRAPH:

Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace.

Same.

Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated.

I’d change “some” to “disappointing,” and “but” to “and.”

Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.

Same. This statement is key because Fed policy has a more direct impact on housing than it does other sectors.

Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices.

I’d delete the “somewhat,” but that’s just me.

Longer-term inflation expectations have remained stable.

This should go. Inflation expectations have trended downward.

SECOND PARAGRAPH

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

Boilerplate.

The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.

Blah blah blah.

The Committee continues to see downside risks to the economic outlook.

Same. But what’s on my mind, and others in the Fed, is any negative problems potentially caused by prolonged low rates. The “reach for yield” argument.

The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

Same, but I’d be curious if they say anything about the potential of deflation. Actually, it seems very likely that inflation will be below 2% for the short-term.

THIRD PARAGRAPH

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

This paragraph is the biggie, and I would expect any tapering language to be here. As far as continuing the $85 billion, I strongly doubt will see any change in the short-term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Same.

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

This sentence is difficult to maintain since long-term rates have come up while inflation expectations have fallen. This means that higher real rates have risen. Well, risen to 0%, but you get the idea. I suspect that’s in anticipation of stronger growth, but I don’t know what the Fed will say.

I’d be very interested to hear if the Fed ties any tapering language to specific metrics like NFP. I doubt that will happen, but you never know. It will probably be something like, “with a stronger housing market and financial markets, the Committee doesn’t anticipate asset purchases continuing into 2015.”

FOURTH PARAGRAPH

The Committee will closely monitor incoming information on economic and financial developments in coming months.

Sure.

The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

I’m not sure this sentence will stay. I think the market wants specifics.

The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

Or reduce? I think this sentence will be gone.

In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

This doesn’t really say much, but it may be gone due to more specific language about QE. While I doubt QE will end soon, the Fed may make it clear that QE will end at some point.

FIFTH PARAGRAPH

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.

No change here.

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Same but the inflation language may be updated to reflect more recent data.

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

More boilerplate.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Blah.

SIXTH PARAGRAPH

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.

Probably the same.

Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Hmm. This is a wildcard. The inflation expectations argument seems to be a non-starter, but there is the issue of financial distortions caused by prolonged low rates. It’s like putting a magnet near a compass. Bernanke has downplayed this concern before but it will be interesting to see if others on the FOMC are on board. It will be news if there are more than two dissenting votes. Three or more would be very big news.

More to come.

Posted by on June 18th, 2013 at 1:32 pm


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