The Corner

Federal Reserve Does Nothing New, Says a Little New

The Federal Reserve’s Open Market Committee released the statement from its latest meeting this afternoon, describing the U.S. central bank’s take on the state of the economy, and what the bank’s policies will be over the next few months. As was widely expected, they announced that they will stay the course of quantitative easing from their previous statement, made in March, when they announced that they would . . . stay the course. The key assessment of the labor market:

Economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. . . . 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.

Those conditions mean that the Fed’s decided to maintain the current state of its quantitative-easing program, which involves the purchase of about $85 billion a month in federal debt and government-agency mortgage-backed securities. Their assessment suggests laughably little change in the economic landscape: While in March, Morgan’s mandarins observed that ”labor market conditions have shown signs of improvement in recent months,” now, they’ve “show improvement in recent months, on balance.” Where they worried in March that “fiscal policy has become somewhat more restrictive” (referring to the 2013 tax increases and slower growth in government spending), now, they declare that “fiscal policy is restraining economic growth” (the preliminar first-quarter GDP reports do suggest so). If you’d like to look for yourself at how their prognosis and policies have changed, see the always-valuable Wall Street Journal Fed-statement tracker.

The one notable aspect to the statement is that they add a sentence to emphasize that, depending on coming conditions, policy can and will change, eventually:

The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

While supporters of a more active Fed may be cheered by that statement, since it suggests that the Fed at least is acknowledging it could conceivably choose to do more, it goes the other way, too: For instance, if inflation rises or inflation expectations rise even more, policy could be tightened fairly soon. There’s no particular reason to think that will happen, though — inflation has actually been running well below the Fed’s target recently; the measure they use, a chained assessment of consumer purchases, rose at an annual rate of just 1.2 percent in the first quarter of the year. The other, more likely, reason policy would (and eventually will) be tighened is if the labor market improves — and the Fed seems to think this could happen relatively soon. (These two factors, employment and inflation, being the Fed’s “dual mandate” which they seek to accomplish with their policies.)

The Economist observes that, outside of official statements, key Fed players see their employment metrics being met as soon as this summer, and policy therefore being tightened this fall. The president of the San Francisco Fed and a former member of the Open Market Committee, which sets the central bank’s policy, said this on April 3:

Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer.  If that happens, we could start tapering our purchases then.  If all goes as hoped, we could end the purchase program sometime late this year.

The magazine also notes that the minutes from the policy-making committee’s March meeting indicate that policy could be tightened by this fall (minutes are released after a meeting’s statement is announced, but before the next meeting — so this Mach’s minutes were released on April 10). But many would suggest that, ceteris paribus, is safer to bet on the side of jobs stagnation, and therefore, continued loose policy from the Fed. In fact, a combination of prolonged labor-market pain and below-target inflation would strengthen arguments for more stimulus from the bank, but that doesn’t seem too plausible, despite the Fed’s professed willingness.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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