The Federal Open Market Committee today kept the target range for the federal funds rate unchanged at 0.0% to 0.25%.
The Committee also decided to continue the purchases of agency mortgage-backed securities and longerterm Treasury securities at a pace of $40 billion and $45 billion per month, respectively.
The forward-guidance thresholds were also unchanged. FOMC members anticipate that this exceptionally low range for the federal funds rate will be appropriate at least as long as: 1) the unemployment rate remains above 6.5%, 2) expectations of annual inflation over the next two years do not exceed the Committee’s 2% longer-run goal by more than 0.5 percentage points; and, 3) longer-term inflation expectations continue to be well anchored.
The only noticeable changes in the statement include a less encouraging assessment of the recent performance of the housing sector, which has “slowed somewhat” in recent months, and the removal of the reference to the threat of tighter financial conditions slowing down the recovery that was present in September’s communiqué. Furthermore, FOMC members still deem “economic activity has continued to expand at a moderate pace”.
Esther George voted against the Committee’s actions, concerned that continued accommodation increased the risks of future economic and financial imbalances, and that, over time, could cause an increase in longterm inflation expectations.
Key Implications
After passing on tapering in September, and factoring in the repercussions of the recent government shutdown and the debt limit impasse, the writing was on the wall that this FOMC meeting would yield a dull statement. This time around, the FOMC did deliver on expectations.
Given the relatively minor changes in the language, it is difficult to assess whether anything has changed within the FOMC regarding the likelihood and the timing of tapering. One reason for this may be that the lack of data availability as a consequence of the government shutdown limited the Fed’s ability to more properly gauge economic conditions.
We believe the odds are still in favor of a reduction in monthly asset purchases to start in March 2014. However, the recent softening in both the housing and labor markets, coupled with the lingering uncertainty stemming from January’s pending fiscal deliberations provide more than enough factors to potentially alter the Fed’s ongoing assessment of the macroeconomic outlook; and, with it, our own expectations about the future stance of monetary policy.
TD Bank