Fed Stays the Course

by Patrick Brennan

This afternoon, the Federal Reserve’s Open Market Committee released its statement of conclusions and decisions made at its January meeting. It confirmed, as was expected, that the Fed would stick to its current easing policy: purchasing $40 billion in government mortgage-backed securities each month and $45 billion in Treasury bonds (Operation Twist, selling shorter-term assets and purchasing longer-term ones, but not further changing the size of the Fed’s balance sheet, ended at the end of 2012 as expected). It reaffirmed its December promise to continue this policy until unemployment drops below 6.5 percent or one-to-two-year inflation expectations rise above 2.5 percent. So since there is no change in policy, the main interesting news is what the Fed has to say about the state of the economy, reflecting some of the disappointing results we saw from today’s fourth-quarter GDP number:

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. . . .

The weather-related disruptions obviously refer to Hurricane Sandy, while “other transitory factors” has generally been read as referring to the economic costs of the fiscal uncertainty at the end of 2012, which, as we saw from today’s GDP number, certainly did reduce government expenditures, especially defense, and most likely contributed to a costly drawdown in corporate inventories. But looking forward, they’re actually a little more bullish than they were in December:

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. 

In their previous statement, the parallel assessment expressed “[concern] that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions” — the committee is apparently now more confident that their policies are working to create or maintain the conditions necessary for recovery.

They also appear to be comparatively less concerned about the still-serious euro crisis, too, saying: “Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook.” (In December, they said that “strains in global financial markets continue to pose significant downside risks.”)

In case you’re interested in any more monetary minutiae, the Wall Street Journal’s Fed statement comparison tool is always useful — you can look at exactly how their missives change month-to-month.

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