The FOMC meeting ended with the announcement of monthly asset purchases of 65 billion dollars, of which 35 billion in Treasuries and 30 billion in MBSs, as expected by the market…..
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The vote was unanimous. The assessment of the economic outlook is improving: the statement observes that growth has accelerated over recent quarters, and the labour market, despite some mixed indicators, has improved further. The Fed acknowledges a rather fast expansion in consumption and investments, while repeating that fiscal policy is still slowing growth, although restrictiveness is easing. For what concerns the variables that contribute to the formulation of forward guidance, the unemployment rate is acknowledged to be dropping consistently, while remaining high, while inflation is still below target, although expectations are well anchored.
Therefore, as was the case in December, the FOMC considers risks as “more nearly balanced”, and will continue to monitor inflation seeking confirmation that the price trend is nearing the 2% target. Given this assessment of the economic scenario and of the improvements recorded, the Committee has opted for another “measured” reduction of monthly assets purchases: starting in February, the Fed will purchase assets worth 65 billion dollars a month, and continue reinvesting coupons and bonds reaching maturity, with the aim of exerting downward pressures on yields and making “financial conditions more accommodative”.
The statement reasserts that purchases will continue to be made “in measured steps” until the outlook for the labour market will have improved substantially against a background of price stability. In any case, the reduction of asset purchases is “not on a pre-set course”, and the Fed may change the pace of its interventions depending on outlook for the labour market and on inflation, also weighing the risks and benefits of the programme.
Lastly, the Committee confirmed its forward guidance on rates, using the same wording as in December, to assert that the fed funds rate will stay at its current level “at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored”. As before, the statement remarks that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%” especially if inflation stays lower than the longer-run target; when the time comes to raise rates, the hikes will be implemented taking a “balanced approach”.
The FOMC is now in a wait-and-see stage, in order to assess economic data, which should continue to improve. Changes to the wording of the statement were limited, but signal the Committee’s belief that growth is taking hold. The unanimous vote to confirm the tapering process is proof that the choice to gradually reduce stimulus is a shared one, and creates favourable conditions for Yellen’s inauguration as Fed Chairman at the beginning of February.
The fact that the FOMC wanted to reassert the lack of a predetermined path for the tapering allows freedom in taking future decisions on purchases, which in our view could be reduced at a slightly faster pace than at present.
The minutes, due for release in mid-February, will provide further information on the debate which took place over the past two days, including the opinions participants on the turmoil which recently hit the emerging markets. We expect the FOMC to modify its forward guidance at the March meeting, or at the latest in June, reducing the weight of the unemployment rate and/or including other variables for the assessment of labour market conditions, or linking a rate hike more directly to the level (or a range around) the long term unemployment rate.
The inflation path will take on greater importance for the Fed under Yellen’s leadership, and will be used to persuade the markets that the first fed fund rate hike remains a distant prospect, even if the unemployment rate should move below the 6.5% threshold in the second half of del 2014.
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