As expected, the Fed announced no policy changes at its FOMC meeting yesterday. 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. The following excerpt from yesterday’s FOMC statement is very similar to what was said in the previous meeting and sums up the situation:
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program 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.
Many are now thinking we won’t see the start of tapering until well into 2014. This CNNMoney article provides some insights into when it may occur:
Add in the Fed's leadership transition, as Bernanke's term ends in January, and Fed watchers largely think the central bank has to wait until at least its March 2014 meeting, before making any major policy changes.
"I don't think Federal Reserve Board members would feel very comfortable about beginning the tapering process until we're closer to 200,000 jobs added each month. We're a long way from there -- in fact we're moving in the wrong direction," said Mark Zandi, chief economist for Moody's Analytics.
And just like previous meetings, there was just one vote against the action.
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.
Inflation and I Bonds
Esther L. George isn’t the only economist worried about future inflation. Alan Greenspan, the former Federal Reserve chairman, has described why he’s worried.
So far inflation hasn’t been a problem, at least based on CPI and other government-based measurements. That continued yesterday when the government released its September CPI report (delayed due to the government shutdown). As reported by the LA Times:
The monthly gain in overall consumer prices was in line with analysts' expectations and came because of a rebound in gas prices. But stripping out the volatile energy and food components, the so-called core consumer price index ticked up just 0.1% for the second straight month. And on a 12-month basis, this reading of core inflation was up 1.7%, down from 1.8% in August.
By this measure, inflation remains well below the Fed's 2% target and 2.5% threshold for tightening policy, allowing officials to maintain a stronger focus on lowering unemployment than its other mandate of controlling prices.
Yesterday’s September CPI release also allows for the calculation of the next Series I Savings Bond inflation component. Jonathan at MyMoneyBlog has already done this, and he has calculated that the I Bond inflation component will be 1.18%.
Future FOMC Meetings
The next two FOMC meetings are scheduled for December 17-18, 2013 and January 28-29, 2014. The December meeting will include the summary of economic projections and a press conference by Chairman Bernanke. If confirmed by the Senate, Janet Yellen will become the new Fed Chairperson on February 1, 2014.