Not to be outdone in the news-making department by the impending Congressional agreement on the budget, the Federal Reserve announced on Wednesday a $10 billion per month reduction in asset purchases to $75 billion from $85 billion, commencing in January 2014. We previewed this outcome in our commentary last Friday.
Boston Fed President Eric Rosengren cast the only dissenting vote, noting that the unemployment rate is still elevated and inflation is well below the Feds target rate.
Key points from todays decision:
The unemployment rate is projected to decline to 6.6% by the end of 2014, a small reduction from the prior forecast. In remarks following the meeting, Chairman Bernanke encouraged viewing labor market conditions beyond the unemployment rate to get a more complete picture.
The Fed remains significantly concerned about inflation, which is reflected in the emphasis in the forward guidance. The Fed predicts contained inflation throughout the entire forecast period. The Fed believes that several special factors, such as the deceleration of health care costs, will be reversed as economic growth advances.
Except for three of its members, the FOMC expects a higher federal funds rate in 2015. Only two would prefer a higher federal funds rate in 2014.
The U.S. bond market, for the most part, shrugged off the decision, with yields hardly budging after the announcement. Equity prices rallied, mostly as a vote of confidence on the Feds statement about the cumulative progress that has occurred in the economy. Clearly, efforts have succeeded to reduce the shock of monetary policy movements since tapering was first mentioned last May.
The Feds indication of "measured steps at future meetings" and "no preset course" are key factors to guide markets in assessing the Feds next step. Inflation readings will be critical, as will the labor market indicators. New members of the FOMC in 2014 and a new Fed chairperson are additional nuances well all have to consider.
But the long journey to normalize monetary policy had to begin with a first step, and we think it was very appropriate to take such a step at this time.