The Federal Reserve Open Market Committee completed their two-day April meeting today, with no real surprises. As many expected, the group announced an additional tapering amount of $10 bil./month, which now lowers the monthly treasuries and mortgage-backed securities being purchased down to $45 bil./month.
This was an FOMC ‘lite,’ so no press conference scheduled afterward and no release of Fed economic projections, so less to bicker about than normal. The committee’s formal release noted that broader economic factors have been impacted negatively by the winter weather, but are showing signs of improvement, as has household spending; however, business fixed investment fell during the period.
Fed item check:
- Unemployment: Better, but pace still lagging gains that typically improve mid-cycle. The updated government report will be out this coming Friday, but the Fed’s original threshold of 6.5% is drawing near, so that’s been removed as a specific target. But, the figure remains well above the sub-5% levels reached during the last cycle that ended in 2007 and above their definition of ‘full’ employment.
- Inflation: Low, as in +1.5% for the trailing 12 months ending in March. With a stated target of 2%, the Fed believes they can continue to act in a pro-growth manner as the risks of not growing ‘enough’ outweigh the negatives of the large balance sheet.
- Economic growth: Mixed, but hopeful. Had appeared to be improving; however, a rough winter stuck a pothole in the road. First quarter GDP came in at an anemic +0.1%, largely blamed on weather and special factors unique to the quarter. Q2 estimates appear to be much higher (2-3%), but higher early estimates have been the rule in recent quarters as economic ‘potential’ has been running higher than actual results achieved. As growth certainly isn’t setting any records, keeping rates low for as long as possible is the Fed’s implied insurance policy (aka soothing words of ‘forward guidance’) in case things don’t grow as planned.
- Monetary policy/rates: Forward guidance remains, with expected low rates until at least early 2015, condition-dependent.
The Fed was and has been catching quite a bit of flak for their late start of tapering and the slow pace in which it appears it’s happening. At the same time, each hint of possible interest rate tightening a month or two earlier than expected next year (where consensus estimates have it pegged) has rattled markets—we want it all, as usual. This has been rehashed repeatedly, but it’s important to remember that QE was an emergency program—designed to provide stimulus at a time where other growth wasn’t available. Other private-sector growth does now seem to be available, albeit perhaps not much growth, but still some nonetheless. At the very least, enough to warrant graduating from life support.