Fed Stays the Course, Cites a Pause in Growth
As expected no policy changes were announced in the first FOMC meeting of the year. Today's FOMC policy statement looks very similar to the December statement. The same language was used regarding expectations of the federal funds rate:
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.
The new policy statement did note the recent weakness in the economy, but this was attributed to "transitory factors":
growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors
This looks similar to what economists have been saying about today's GDP report. The negative GDP number for the last quarter was unexpected, but economists don't seem concerned. In this CNNMoney article, an economist was quoted as saying "The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging."
With sluggish economic growth and the unemployment rate remaining high, we shouldn't expect any changes from the Fed. As we saw from the Fed last month, the unemployment rate isn't expected to fall below 6.5% until sometime in 2015. That means no Fed rate hikes until maybe 2015.
There are four new voting members at the FOMC for 2013. At the start of each new year, four regional presidents rotate into voting roles. One of those new members, Esther L. George (the president of the Federal Reserve Bank of Kansas City), voted against the policy action. She was the lone dissenter. According to the FOMC statement:
[George] 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.
This CNNMoney article has an interesting graphic showing how the voting FOMC members rank in terms of dovish or hawkish attitudes. Only George and James Bullard (president of the Federal Reserve Bank of St. Louis ) are considered hawks. The other ten on the FOMC are considered doves.
Janet Yellen is one of the most dovish members. There is some expectation that Yellen will be nominated by President Obama to replace Bernanke as Fed Chairman in January 2014 (Bernanke isn't expected to want a third term). So I wouldn't hold my breath for the Fed becoming any more hawkish in the coming years.
The next two FOMC meetings are scheduled for March 19-20 and April 30/May 1. The March meeting will include the summary of economic projections and a press conference by Bernanke.