After the fireworks at the December meeting the Fed does nothing new in January. But somehow the Committee had to acknowledge the weak GDP number; the Fed says economy has “paused” which probably is as good a description as any. Weather and other transitory factors were scapegoats; as we wrote earlier today one better average out Q3 and Q4 to get a feel for the economy’s underlying trend which is running at 1.5%.
Meanwhile consumer spending, business investment and housing were upgraded while inflation was left untouched in the statement. Global market strains have eased but the Fed continues to see downside risks to the economic outlook. Other than that, there were only minor tweaks compared to the December FOMC statement. One could say that the USD 85 billion purchase plan was firmed up; without it economic growth will not be strong enough to generate the gradual decline in the unemployment rate.
Looking ahead, in our view consumer spending will be weak in the near term; the social security tax hike that arose as a result of the year-end federal budget agreement will have a powerful albeit temporary effect on disposable income and consumer spending. While we expect positive growth in consumer spending, what recent readings on consumer confidence suggest is that the risk is to the downside so keep an eye on it.
Lacker is no longer a voting member. Instead we have Kansas City Fed’s Esther George taking his place as dissenter. Evidently she worries about rising inflation expectations and future imbalances. As an aside it was interesting to see that St. Louis Fed’s Bullard (a hawk in the past) votes with the majority. We have to say that Bernanke is skilled when it comes to create a consensus.
The Fed will not hike its key rate until the spring of 2015 according to our forecasts. Meanwhile we expect a continued expansion in the Fed’s balance sheet into early 2014.
SEB