The Federal Reserve’s Open Market Committee released its latest policy statement today, which announced no change in policy, pushing off for some time the possibility of “tapering,” i.e., the Fed’s slowing quantitative-easing program. The Fed will continue to purchase $40 billion worth of government-agency mortgage-backed securities each month and $45 billion worth of government debt each month, but at the press conference following the statement release, Bernanke offered a sketch of how, assuming the Fed’s current economic projections (which have improved a bit) come true, the program will be tapered and then halted.
Ceteris paribus, the purchases will “moderate,” i.e., slow, ”late this year” (2013); QE3 will end when unemployment reaches 7 percent, which they project will happen “around mid ”; and then the Fed will begin to raise its interest rates from zero when unemployment hits 6.5 percent, which they expect around the beginning of 2015.
Markets don’t seem to be terribly pleased with the news, and certainly weren’t reassured: At closing today, the Dow had dropped 1.3 percent from the beginning of the day, off about 200 points.
But Bernanke was doing his best to assuage concerns about tightening, arguing, for instance, that the metrics he pointed to were “thresholds,” not “triggers,” meaning it would still be up to the Fed to keep policy loose after they’d happened — the words “at least as long as,” referring to the commitment not to raise rates until unemployment hits 6.5 percent, he called especially “important.” He also tried to underscore that the not-too-distant slowing of asset purchases wasn’t akin to actual shrinking of the monetary base, saying a smaller QE3 would be akin to a car that’s still accelerating, but the gas pedal has been eased, it wouldn’t mean “applying the brakes” yet.
After Bernanke so strongly emphasized the future policy implied by the Fed’s economic projections, Jon Hilsenrath of the Wall Street Journal pointed out one problem with the above schedule: The Fed’s economic projections have been notoriously optimistic in recent years. But Bernanke was happy to point out that, if the Fed’s projections were wrong, that would just mean more easing. Alas, all of this argument didn’t seem to calm equities markets, which dropped, or keep bond yields down (they jumped a little).
One of the few changes to the Fed’s statement was about inflation, which has continued to be low, and clearly lower than the Fed’s 2 percent target: In March, the committee said that inflation was “running somewhat below” the Fed’s objective due to energy prices; now it’s just running plain-old “below” the target, “partly reflecting transitory influences” (Bernanke named slower health-care inflation due to the sequester, interestingly). Two members of the twelve-member board dissented from the statement on inflation-related grounds: Governor George, as she has in the past, objected that asset purchases risked increasing inflation, while a new dissenter, Governor Bullard, argued that the Fed was now failing to keep inflation high enough “should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”
You can read the policy statement and see all the specific changes here with the Wall Street Journal’s statement tracker.