The US Federal Reserve’s open market committee looked forward yesterday to the time when quantitative easing would be relaxed and markets would move out of regulatory control – but framed its discussion in the usual control-freak terms.
For all that, the Fed’s release of its view on the US economy (its impacts on wider economies come a distant second) shows it has a deepseated problem with its recipe for a fix: Although household spending is picking up, unemployment isn’t falling.
The speech below is evidence of increasing waffle from the Fed because it’s not leading but feels it ought to be in charge.
It has a second problem. Inflation targets in a range of 1-3% were introduced widely in the 1990s to get interest rates down from double-digits and to take out the inflation component of economic expectation. Now the Fed feels it needs inflation to oil the wheels of business and prevent deflation.
The committee said: “Information received since it met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labour market indicators were mixed but, on balance, showed further improvement.
“The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the committee’s longer-run objective, but longer-term inflation expectations have remained stable.
“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. The committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labour market conditions will continue to improve gradually, moving toward those the committee judges consistent with its dual mandate.
“The committee sees the risks to the outlook for the economy & the labour market as nearly balanced. The committee recognises that inflation persistently below its 2% objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
“The committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labour market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions since the inception of the current asset purchase programme, the committee decided to make a further measured reduction in the pace of its asset purchases.
“Beginning in May, the committee will add to its holdings of agency mortgage-backed securities at a pace of $US20 billion/month rather than $US25 billion/month, and will add to its holdings of longer-term Treasury securities at a pace of $US25 billion/month rather than $US30 billion/month.
“The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt & agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The committee’s sizeable & still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the committee’s dual mandate.
“The committee will closely monitor incoming information on economic & financial developments in coming months and will continue its purchases of Treasury & agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labour market has improved substantially in a context of price stability.
“If incoming information broadly supports the committee’s expectation of ongoing improvement in labour market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on the committee’s outlook for the labour market & inflation, as well as its assessment of the likely efficacy & costs of such purchases.
“To support continued progress toward maximum employment & price stability, the committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0-0.25% target range for the federal funds rate, the committee will assess progress – both realised & expected – toward its objectives of maximum employment & 2% inflation.
“This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial developments.
“The committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.
“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 & inflation of 2%. The committee currently anticipates that, even after employment & inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.”
Attribution: Fed release.