The Fed Open Market Committee completed their March two-day meeting with no significant changes to their policy or communication to the outside world. However, they did acknowledge an improvement in the nation’s growth prospects (to ‘moderate’), as noted by economic data and survey results in the first few months of this year. (Although not noted in their announcement specifically, the Federal Reserve’s prediction for GDP growth is a central tendency of 2.3-2.8% in 2013, 2.9-3.4% in 2014, and 2.9-3.7% in 2015, as well as unemployment levels in those same years of 7.3-7.5%, 6.7-7.0% and 6.0-6.5%, respectively.)
Nevertheless, the FOMC voted for economic easing to continue for the foreseeable future—which has taken the form of Treasury and mortgage bond purchases in upwards of $85 billion/month. Accordingly, they have continued to reference their policy threshold of a 6.5% unemployment rate, coupled with 1-2 year forward-looking inflation of no greater than 2.5% and ‘well-anchored’ longer-term inflation expectations, as a guideline for a possible exit point.
Esther George, the Kansas City Fed President, was the lone dissenting vote on the grounds that such continued accommodation has the potential for increasing ‘financial imbalances’ including higher inflation expectations. The longer this policy continues, we see more and more debate surrounding potential inflation. While there are market strategists and economists that are convinced that ongoing monetary stimulus has no other outcome than high inflation, as this excess money makes its way downward into the economy and into consumer prices and wages; other academics argue that the ‘hole’ created during the Great Recession was so deep and wide that we are still essentially digging ourselves back to level ground—and banks aren’t helping by keeping lending low (so the money ‘multiplier’ effect isn’t as strong as it normally is). We often think that the biggest threats are those not on the front page of the paper, so perhaps inflation will become a greater concern when it is off the front page and forgotten about yet again.