Federal Reserve To Continue Bond Buying; But For How Long? - June 19, 2013
The much anticipated statement from the Federal Reserve following the conclusion of its two-day monetary policy meeting was issued at 2:00 P.M. (EDT), and it brought few surprises. Specifically, Federal Reserve officials said that the lead bank will stay on the same course with regard to its accommodative monetary policies.
Although the central bank noted that economic activity has been expanding at a moderate pace and its outlook for the U.S. economy and the labor market is a bit brighter than it was earlier this year—following a weak conclusion to 2012, with GDP expanding by less than 1% in fourth quarter—it is still not ready to pullback on its aggressive bond-buying program. The Federal Reserve will continue to purchase $85 billion a month of Treasuries and mortgage bonds in an effort to support a stronger economic recovery. In addition to the bond buying, the lead bank will employ other policy tools as appropriate until the outlook for the labor market has improved substantially in a context of price stability. It plans to keep short-term rates at record lows at least until the unemployment rate, which currently sits at 7.6%, reaches 6.5%. Reaching that goal could take quite a while, especially with recent monthly job creation falling short of the 200,000 mark. Historically, that level needs to be reached for several months in a row before a significant reduction in the unemployment rate is seen.
Meantime, some pundits may take the Federal Reserve’s aforementioned slightly improved outlook for the economy and labor market and its statement that “downside risks to the outlook” had diminished since last fall as a hint that Fed officials are moving closer to reducing the lead bank’s stimulus measures. However, the latest policy statement gave no rigid indication of when such a scenario might occur. The Federal Open Market Committee will continue to monitor incoming information on economic and financial developments in the coming months and will be prepared to increase or reduce the pace of its bond purchases to maintain appropriate policy accommodation as the outlook for the job market or inflation changes. On the latter front, the Fed faces little resistance, as both producer (wholesale) and consumer pricing data continue to suggest the absence of inflation in the marketplace.
All in all, the latest FOMC statement does little to change our view that the Federal Reserve will continue its aggressive stimulus measures for the time being. Our sense is that the labor market will have to show significant progress in the second half of this year before the Federal Reserve even considers taking its foot off the pedal with regards to its accommodative monetary policies.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.