– The Federal Market Open Market Committee (FOMC) maintained the fed funds target at 0.0% to 0.25%, and balance sheet expansion will continue with $40 billion of agency mortgage-backed securities (MBS), $45 billion longer-term Treasury purchases, and the reinvestment of proceeds.
– The fed funds target range is still anticipated to be “appropriate at least as long as the unemployment rate remains above 6.5%” and inflation during the next year or two is expected “to be no more than a half percentage point above the Committee’s 2% longer-run goal.”
– Statement addition: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate” level of policy accommodation as conditions change.
– In the near term, given the uncertainty about how quickly the economy reaccelerates, we expect the Fed to maintain the current pace of security purchases. As the economy builds momentum, policymakers will likely gradually taper the pace of purchases although this is only likely to occur late in the year with the fed funds rate expected to remain at its current “exceptionally low range” of 0.00% to 0.25% into 2015.
As expected, the FOMC made no changes to the target for the federal funds rate holding it in the 0.0% to 0.25% range, a level that is still anticipated to be “appropriate at least as long as the unemployment rate remains above 6.5%,” and the outlook for inflation remains “no more than a half percentage point” above the Committee’s 2% longer-run goal. Asset purchases were maintained at a monthly pace of $40 billion for agency MBS and $45 billion for longer-term treasures with principal payments continuing to be reinvested.
The FOMC noted that the economy “has been expanding at a moderate pace” and the labour market has “shown signs of improvement in recent months,” although “the unemployment rate remains elevated.” The Fed echoed the January statement that housing markets have “strengthened further” and household and business spending continued to advance. Weighing against these improvements, however, is the drag from fiscal policy. The statement also reiterated that the risks to the outlook are deemed to be to the downside and that inflation, even after accounting for energy prices, is “somewhat below” target.
With fiscal headwinds providing a drag on growth in the near term, it would have been a shock if the Fed had introduced any hints of changing its current very accommodative policy stance. Looking ahead, even the expected acceleration in activity in the second half of 2013 and in 2014 is unlikely to result in the unemployment rate moving the Fed’s 6.5% threshold, meaning that any tightening in policy in this period will come from a pulling back in the non-traditional measures rather than an increase in the target for the fed funds rate. Today’s addition to the statement that indicated a willingness to alter the pace of securities purchases in line with any changes in the outlook for inflation or the labour market implies that policymakers will react if there is a material shift in conditions.
In the near term, given the uncertainty about how quickly the economy reaccelerates, we expect the Fed to maintain the current pace of security purchases. As the economy builds momentum, policymakers will likely gradually taper the pace of purchases although this is only likely to occur late in the year with the fed funds rate expected to remain at its current “exceptionally low range” of 0.00% to 0.25% into 2015.
RBC