The second FOMC meeting of the year finished this afternoon. In addition to a statement, the Fed released its economic projections, and Chairman Bernanke gave a briefing to the press. As expected, no policy changes were announced. In fact, the statement was very close to the January statement. There were just some minor changes to the FOMC’s view of the economy. One example is a slightly stronger view of job growth:
Employment has continued to expand at a moderate pace but the unemployment rate remains elevated.
Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated.
Another small change was the addition of fiscal policy risks:
Household spending and business fixed investment advanced, and the housing sector has shown further improvement.
Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive.
Most everything else in the FOMC statement remained the same. Just like in January, only Esther George dissented in the vote. The statement provided the reason for her dissent:
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.
In the economic projections, the Fed slightly reduced its forecast for 2013 GDP growth and inflation growth. The forecast for the 2013 unemployment rate improved slightly with the upper range of the unemployment rate forecast falling from 7.7% to 7.5%.
With slow growth and an elevated unemployment rate, we should expect a long wait before we see higher rates. A large majority on the Fed (14 out of 19) still don’t see any policy firming before 2015.
After Chairman Bernanke’s opening remarks, he took several questions from the reporters. One common theme in his answers was that he and the FOMC will need to see a sustained improvement for several months in the economy and in the unemployment rate before any policy firming will take place. So it’s clear savers have a long wait for higher rates.
One interesting question came from a NYT reporter who asked Chairman Bernanke when was the last time he spoke with someone who’s unemployed. This seemed to be intended to pressure Chairman Bernanke to be more dovish in the monetary policy in hopes that it will help to reduce the unemployment rate. Chairman Bernanke stressed that there’s a question of effectiveness and there are risks and costs that must be carefully monitored. For those who can’t wait for Chairman Bernanke to leave, this reminds us that we could easily get a more dovish chairman who has less concern for the questions of effectiveness, costs and risks of extreme accommodation policies.
A few reporters asked questions about Cyprus and its possible effect on the U.S. economy. Chairman Bernanke explained that it’s a tiny economy with some unique issues, and it shouldn’t have direct implications on the U.S. economy unless depositors in other countries start losing confidence in their banks. One reporter asked if there is any chance that such a tax on deposits could be levied in the U.S. Chairman Bernanke said it would be “extremely unlikely”. He also mentioned that the FDIC actually increased its deposit insurance guarantee during the U.S. economic crisis.
Future FOMC Meetings
The next two FOMC meetings are scheduled for April 30/May 1 and June 18/19. The June meeting will include the summary of economic projections and a press conference by Bernanke.