The Fed surprised economists today by delaying the start of tapering of its bond buying program (Quantitative Easing). Most economists were predicting tapering of $10 to $15 billion. This is essentially more of the same for savers. We’ll have to continue to wait for just the early start of a long tightening process that will eventually lead to higher deposit rates. Here’s an excerpt from today’s FOMC statement:
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.
In the last few months, the markets have pushed up the Treasury yields partly due to the expectation that tapering was likely going to begin in September. Some banks and credit unions responded by raising long-term CD rates. Due to the delay in tapering, we may see a fall in Treasury yields and an end to higher long-term CD rates.
The rest of the FOMC statement was very similar to the July statement. The forward guidance of short-term interest rates remains the same:
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.
And just like previous meetings, there was just one vote against the action.
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.
The Fed also updated its economic projections. One important change was the downward revisions. As noted by the Calculated Risk Blog, this was likely an important reason why the Fed to delay tapering:
With the downgrade to GDP and inflation (for 2014), it makes sense that the Fed decided to wait for more data.
Another worrisome change in the projections is the push out of higher target federal funds rate. The average target federal funds rate expected for the end of 2016 is around 2%.
Chairman Bernanke’s press conference was uneventful. One reporter noted how the Fed’s projections have been consistently overly optimistic. Chairman Bernanke agreed, and if that trend continues, the start of tapering may be a long way off.
Future FOMC Meetings
The next two FOMC meetings are scheduled for October 29-30 and December 17-18. The December meeting will include the summary of economic projections and a press conference by Chairman Bernanke.