The fourth FOMC meeting of the year finished this afternoon with a release of the policy statement. There was also a press conference and a release of economic projections.
The most significant outcome of today was Chairman Bernanke’s description of how he expects the Fed to taper its bond-buying program. In his press conference he described the change using a car driving analogy of “letting up a bit on the gas pedal as the car picks up speed, not to begin to apply the brakes”. The Chairman said that if the economy continues to improve as expected, the Fed will likely begin to taper its bond-buying purchases later this year and keep reducing the purchases until new purchases end around the middle of next year. That news appeared to have spooked the markets. The stock market had big losses, and the 10-year Treasury yield rose to 2.33% from 2.18%. You have to wonder what kind of stock market losses we’ll see when the Fed actually begins to taper.
For savers the tapering is only the start of a long process which will lead to higher deposit rates. Chairman Bernanke said that increases in the target Fed funds rate is unlikely to take place until long after the bond-buying ends. The latest FOMC projections show 14 out of 19 of the members believe the first rate hike will likely take place sometime in 2015.
The Chairman mentioned a few times that the 6.5% unemployment target is only a threshold and not a trigger for higher rates. That means that they will consider other factors before deciding to raise rates. This is where the Chairman can have a large impact to policy. A dovish Chairman could lead the FOMC into delaying rate hikes. I know many don’t like Chairman Bernanke, but he’s not considered the most dovish member. If he steps down in 2014 and someone more dovish takes over (like Janet Yellen), that could result in a longer delay before the Fed decides to hike rates. That’s especially the case if inflation remains below the Fed’s 2% target.
One interesting thing to note in today’s FOMC statement is that there were two members who voted against the monetary policy action. In recent past meetings, only Esther L. George had voted against the action. George continued to vote against the action today with the same inflation-hawk argument:
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
The new “no” vote came from James Bullard, but he was actually arguing for more accommodation:
who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings
That could be a bad sign for future policy tightening. If inflation continues to be below the 2% target, more FOMC members may push to delay the tapering which will delay rate hikes.
Calculated Risk Blog has a useful summary of today’s meeting and economic projections with tables of how the projections have changed. Most noteworthy is the downward projection of PCE inflation for 2013. As CR mentioned:
The Fed is clearly missing on the low side of their inflation target. If that continues, the next move will be to increase purchases!
I wish we could experience this “low” PCE inflation. I think many of us feel that we see much higher inflation with the essential items we purchase for day-to-day living.
Future FOMC Meetings
The next two FOMC meetings are scheduled for July 30-31 and September 17-18. The September meeting will include the summary of economic projections and a press conference by Chairman Bernanke.