The FOMC met and delivered the widely expected result of no policy shift. Wait and see mode continues. Arguably, the statement has a slightly hawkish tinge compared to the January statement in that it recognizes the improved flow of data and reduced financial strains. Most of the action is in the second paragraph. The growth/employment sentence (perhaps we should call this the Okun’s Law sentence?) from January:
The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.
The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate.
“Modest” growth became the more optimistic “moderate” growth, suggesting some more certainty in the outlook, downgrades to Q1 forecasts notwithstanding. Also, the modifier “only” before “gradually” disappeared – a very slight positive shift. Fears of a European collapse shifted from:
Strains in global financial markets continue to pose significant downside risks to the economic outlook.
Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.
I find this sentence interesting given the relative calm in financial markets, both here and across the Atlantic. The Fed, it appears, is less confident than their European counterparts that the crisis has been brought to a halt once and for all. Finally, the inflation outlook, which was:
The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate.
The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.
The Fed did recognize the impending rise in headline inflation, but wisely emphasized its temporary nature and thus reaffirmed their view that inflation would remain contained. This is also reiterated in the first paragraph where they noted stable inflation expectations. We will see headline inflation rise, but no need to panic. Nothing to see here, move along.
I see this statement as a double-edged sword. On one hand, the improved economic outlook argues against additional easing. Unless the unemployment rate starts trending sideways or inflation takes a downward turn, it is hard to see the Fed advancing with plans for additional easing. That said, they are making an effort not to suggest a tightening is imminent. They do not overemphasize the improvements in recent data, nor do they suggest that energy prices should be a concern. And, despite Richmond Federal Reserve President Jeffrey Lacker’s objection, they did not retreat from their expectation that rates will remain low though at least late 2014. This is important, as a commitment to low rates would have more of an effect when there exists upward pressure on interest rates, as opposed to being simply another confirmation that the economy is operating at a decidedly sub-par equilibrium. Moreover, they telegraphed that additional easing is still a possibility, indicating that tightening is not the only game in town. Perhaps they have learned a lesson from last year’s turn toward hawkishness in the spring.
Bottom Line: The Fed isn’t ready to ease further, but isn’t ready to tighten either. If you are looking for the Fed to leverage the current momentum with another blast of easing in an effort to lift us well clear of the lower bound, you are likely to remain disappointed. But at least you can find some comfort, however small, in their obvious effort to make clear they remain far from taking a more hawkish turn anytime soon.
This post originally appeared at Tim Duy’s Fed Watch and is posted with permission.
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