The Federal Open Market Committee (FOMC) at the conclusion of its meeting today announced a further $10 billion reduction in its monthly rate of asset purchases. The increment was similar in size and composition to the first tapering step taken in December.
Some had thought the Federal Reserve might pause in its process because of recent disquiet in emerging markets. Some trace the struggles experienced by some countries to the first mention of tapering last May. But as we have discussed, the problems of many of these markets are of their own making, and it is impossible to ask the Fed to optimize performance across an array of economies.
Unless the unfortunate experience of emerging markets produces more direct consequences for the United States, the Fed will continue to focus on U.S. fundamentals. And its post-meeting statement painted these fundamentals in a favorable light. The Fed noted that "growth in economic activity picked up in recent quarters." The fourth quarter gross domestic product accounting is likely to show that real growth in the second half of the year was well in excess of 3%.
The labor market language in the FOMC statement was modified to indicate that "indicators were mixed but on balance show further improvement." Essentially, the Fed is not overly worried about Decembers soft payroll numbers. Inflation views were unchanged from the December meeting. Overall, there is progress toward the twin objectives of lower unemployment and 2% inflation but still some work to do.
The enhanced forward guidance pertaining to the 6.5% unemployment threshold, introduced at the December 2013 FOMC meeting, was left unchanged. Given that we are very near this level and interest rate increases seem far off in the future, the Fed may have to consider modifying the target or dropping it in favor of less-specific language.
Our central expectation is that the FOMC in upcoming meetings will reduce its asset purchases by a similar amount unless something very significant prompts it to slow down or accelerate.
The vote in favor of the tapering was 10-0, the first unanimous decision in more than 2-½ years. This was a favorable result, given the strong views of the regional Fed presidents who are voting in 2014. Presidents Richard Fisher, Charles Plosser, and Narayana Kocherlakota had previously expressed very strong views on policy but opted to go along with the majority this time around.
Perhaps this was, in small part, a gesture of respect for Chairman Ben Bernanke. His departure at the end of this week is truly the end of an era. We thank him for his service and wish him well in the next phase of his life.