David Merkel of Aleph Blog does an outstanding job analyzing the key points of the FOMC statement changes:
| January 2013 | March 2013 | Comments |
| Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. | Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. | Shades GDP view up. |
| Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. | Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. | Shades their view enmployment up. So long as discouraged workers increase, this is a meaningless statement. |
| Household spending and business fixed investment advanced, and the housing sector has shown further improvement. | Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. | New fiscal policy comment, but it should read, “fiscal policy has become somewhat less loose.” |
| Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. | Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. | No change. TIPS are showing flat inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is still near 2.86%.The FOMC is wrong on inflation. |
| Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. | Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. | No change. Any time they mention the “statutory mandate,” it is to excuse bad policy. |
| The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. | The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. | Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right? |
| Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. | The Committee continues to see downside risks to the economic outlook. | Shades down their views of the global financial markets. |
| The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. | The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. | No change. CPI is at 2.0% now, yoy, so that is quite a statement. |
| To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. | To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. | No change.Does not mention how the twist will affect those that have to fund long-dated liabilities.Wonder how long it will take them to saturate agency RMBS market?Operation Twist continues. Additional absorption of long Treasuries commences. Fed will make the empty “monetary base” move from $3 to 4 Trillion by the end of 2013. |
| Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. | Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. | No change. |
| The Committee will closely monitor incoming information on economic and financial developments in coming months. | The Committee will closely monitor incoming information on economic and financial developments in coming months. | No change. Useless comment. |
| If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. | The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. | No real change. |
| In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. | In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. | Maybe they are hedging a little here – if they get close to their objective, they might start to reduce policy accommodation? |
| To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. | To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. | No change.Promises that they won’t change until the economy strengthens. Good luck with that. |
| In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. | In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. | Not a time limit but economic limits from inflation and employment.Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2014, is currently 2.32%. Here’s the graph. The FOMC has only 0.18% of margin in their calculation if they are being honest, which I doubt. |
| In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. | In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. | No change. |
| When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. | When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. | No change. |
| Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. | Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. | No change |
| Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. | Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. | Esther George takes up the thankless task of telling the FOMC that they are doing more harm than good. |
Comments
- Notable: they mention that fiscal policy is less accommodative. Also, some new language leaves room for policy gradualism.
- Not so notable: they shade up their views on GDP and employment, and shade down their views on global financial market stability.
- I really think the FOMC lives in a fantasy world. The economy is not improving materially, and inflation is rising. Note that the CPI is close their 2.5% line in the sand. TIPS-implied inflation 1X1 (one year ahead for one year) is 2.32%, and 5X5 is around 2.86% annualized.
- Current proposed policy is an exercise in wishful thinking. Monetary policy does not work in reducing unemployment, and I think we should end the charade.
- In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn’t work, what will they do?
- Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
- The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations. As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis. Labor employment is the key metric.
- GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.
Question for Dr. Bernanke
Every liability is someone else’s asset. Aren’t you doing nothing by trying to hold long term interest rates lower?
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