The FOMC two-day meeting concludes on Wednesday with Chairman Ben Bernanke’s press conference and new updated forecasts for key variables (Summary of Economic Projections). The strong February employment report in particular will not prompt changes to the policy stance. What we know is that before ending QE, the FOMC is looking for a “substantial improvement” in labor market conditions. How to define “substantial” is debatable but according to one Fed official job growth must be at least 200 000 for six months in a row. Meanwhile it is highly uncertain whether the Fed will introduce thresholds for its bond purchases too, but according to Federal Reserve own research the unemployment rate is the best single labor market indicator. As such, we still think that QE will continue until the unemployment rate approaches 7%. According to Fed’s December projections, the unemployment rate will not reach 7% until sometime next year. As such, we are looking for continued expansion in the Fed’s balance sheet into early 2014, but the pace of asset purchases could well be reduced somewhat later this year.
With respect to the statement, the FOMC will likely acknowledge that economic data has been better recently. Our tracking estimate for 1Q GDP is now 3.0% compared to our official forecast of 2.7% in Nordic Outlook February. While momentum currently is relatively strong, one offset is the sequester which will weigh on growth in 2Q and 3Q in particular. Therefore we leave our forecast for 2013 unchanged at 2.1% at the current juncture.
The fact that economic data has been better recently will also likely be reflected in the economic projections. For the unemployment rate the starting point is lower – the jobless rate fell to a cycle low in February – so the unemployment rate projections will likely be somewhat lower too.
At the press conference, Chairman Bernanke will face questions about the costs and benefits of QE. The testimony before Congress a few weeks ago suggested that in the Chairman’s view the benefits clearly outweigh the costs. While Bernanke acknowledged that accommodative monetary policies may increase certain type of risk taking, he also emphasized that at the current juncture such policies could also reduce risk by making the overall economy stronger. When discussing the costs of keeping an accommodative stance in place for too long it is easy to forget that withdrawing policy accommodation too early could have huge costs as well. Moreover, another hot topic is Bernanke’s recent remarks that the FOMC could delay selling securities or even choose to “exit without ever selling”.
SEB