As expected, there were no significant changes in the FOMC statement or forecasts. But there were tweaks to the first paragraph in particular. The FOMC upgraded its economic assessment but also noted that fiscal policy has become somewhat more restrictive. Moreover the labor market conditions have shown signs of improvement (previously: continued to expand at a moderate pace) while the unemployment rate remains elevated.
With respect to the FOMC projections, released four times a year, the economic outlook was slightly downgraded. Now the FOMC predicted that the economy would expand between 2.3 and 2.8% in 2013 (was 2.3 to 3.0% last December). Their forecast for 2014 was downgraded one tick as well to between 2.9 and 3.4%. Meanwhile the FOMC do not see inflation above 2% anywhere on the horizon. However the FOMC members are more slightly optimistic on the unemployment rate; now they see the unemployment rate between 6.7 and 7% at the end of 2014 compared to 6.8 and 7.3% last December. As you know, the unemployment rate needs to go to 6.5% before rate hikes are back on the agenda.
On the margin, the Fed appears to be somewhat more certain that rates will stay low. Of the 19 FOMC members, 14 do not look for rate hikes before 2015 (unchanged compared to last December). But when looking at the average predicted rate for each year it was a tad lower today, probably reflecting the lower GDP forecasts.
On QE, the FOMC repeats it will buy treasuries at a pace of USD45bn a month and MBS at USD40bn a month. Again the only dissenter was Ester George who was concerned that the high level of policy accommodation increased the risks of future economic and financial imbalances.
Press conference
Bernanke says that the costs of QE “remain manageable“. Meanwhile if progress on the unemployment rate front continues, the Fed may well adjust the pace of asset purchases accordingly. Our take is that while asset purchases may continue into 2014, the FOMC may well slow down its monthly purchases later this year.
Moreover in all likelihood we can stop looking for QE thresholds now. According to Bernanke FOMC haven’t even tried to reach an agreement. According to Bernanke, the lack of thresholds comes from the complexity of the problem.
It is a fact that the economy has slowed down in the spring in the last few years. To be sure, Bernanke has noticed the “certain tendency for a spring slump” but cannot identify the cause.
SEB