No Change in FOMC Policy; Slower Growth

No Change in FOMC Policy; Slower Growth

09/18/2013 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

While noting “improvement in economic activity and labor market conditions,” the Federal Open Market Committee voted Wednesday to continue its policy of near-zero interest rates and its $85-billion-per-month bond-buying program.

At the same time, the Fed’s own economic projections suggested the economy might not grow this year as fast as it expected just three months ago.

In a statement concluding its two-day monetary policy meeting, the FOMC said it “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

The Committee adopted the policy by a 9-1 vote with only Esther George, president of the Kansas City Fed, dissenting. St. Louis Fed President James Bullard, who had joined with George in her dissents earlier this year, voted in the majority as he had at the July meeting.

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” the FOMC said in its statement. “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

The reference to “the tightening of financial conditions” was seen as a comment on the recent increase in mortgage rates, some of which resulted from the Fed’s own discussion of tightening its monetary policy.

The reference to “the tightening of financial conditions” was seen as a comment on the recent increase in mortgage rates, some of which resulted from the Fed’s own discussion of tightening its monetary policy.

The FOMC said its actions “should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate [of price stability and maximum sustainable economic growth].”

Fed Chairman Ben S, Bernanke had originally said the FOMC would wait until the inflation rate rose to 2 percent and the unemployment rate fell to 6.5 percent before the Fed would begin “tapering,” that is gradually tightening its stimulative monetary policy. In recent weeks though Bernanke hinted the FOMC might act before its targets were achieved. Bernanke came under criticism from some economists who suggested by acting before its own criteria were met, the FOMC would damage its credibility.

At the same time its statement was released Wednesday, the FOMC also released the economic projections of the members of the Federal Reserve and the Federal Reserve Bank presidents. [The president of the New York Fed is a permanent member of the FOMC along with four of the remaining 11 regional presidents.]

The projections were slightly weaker than those released three months ago, with slower growth this year —- GDP growing 2.0 percent to 2.3 percent compared with 2.3 percent to 2.6 percent forecast in June and the higher range of GDP growth reduced in the next two years.

The projections suggested the unemployment rate criteria for tightening monetary policy might be achieved next year with a projected unemployment rate of 6.4 percent to 6.8 percent but was anticipated in 2015 when the unemployment rate is expected to range between 5.9 percent and 6.2 percent.

The 2 percent inflation target – as measured by the personal consumption index tallied by the Bureau of Economic Analysis – is not expected to be reached until after 2016.

Even though its criteria for tightening monetary policy remain elusive, the FOMC gave itself some wiggle room.

“In judging when to moderate the pace of asset purchases,” the FOMC said in its statement, “the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”

In other words, even if the targets are not achieved, the Committee said it might act if it believes the economy is on a course to achieve them.

Still the FOMC remained skeptical.

“Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated,” the Committee statement said. “Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

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