Interpreting Fed Speak
The April FOMC statement differed only in a few, mostly unimportant details from the March one and contained no hint whatsoever of a change in policy.
The Committee was slightly more optimistic on the economic outlook and was marginally more attentive to inflation, but at the same time upped its guard about the downside risks to growth due to financial strains.
The changes to the current economic situation were minimal. Interestingly, the interest rate projections were more hawkish, but didn’t affect the FOMC rate guidance. Bernanke left the door for more QE open, but showed no bias towards the issue. Further developments should decide if more QE is needed.
Regarding the policy stance, no changes occurred and paragraph 3, 4 and 5 of the statement were identical to the March one. The Fed keeps its target rate for the Federal Funds rate at 0 to ¼ percent and still anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rates at least through late 2014.
The FOMC also confirmed that it continues its program to extend the average maturity of its holdings of securities as announced in September. It also maintains its existing policies of re-investing principal payments from its holdings of mortgage-backed and agency debt in agency mortgage-backed securities.
It rolls over maturing Treasury securities at auction. Finally, regarding the voting, just as in January and March, Richmond Fed Lacker dissented on the forward looking guidance (late 2014).
The FOMC as before said the economy was expanding moderately. It recognized the improvement in the labor market, but added that the unemployment rate remains elevated. For the first time they added:
despite some signs of improvement
The FOMC continues to expect growth to remain moderate over the coming quarters, but now they added “…and then to pick up gradually”. However, financial tensions got slightly more weight as a downside risk to growth. Instead of “inflation has been subdued in recent months”, the FOMC now said “inflation has picked up somewhat”, but because of higher energy costs.
The FOMC also added that it expects these increases to affect inflation only temporarily. The conclusion on inflation was unchanged:
the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate
Compared to the January forecasts, governors slightly revised their 2012 growth forecast higher to 2.4% to 2.9% (from 2.2 to 2.7%). For 2013, growth is expected to be slightly higher than this year (2.7 to 3.1%), but somewhat lower than the January forecast. The longer run growth rate is expected to be 2.3 to 2.6%.
The governors clearly took account of the rather sharp drop in the unemployment rate recently and lowered their endof-2012 forecast to 7.8 to 8% (from 8.2 to 8.5 in January), followed by a decline by end 2013 to 7.3 to 7.7% and by 2014 to 6.7 to 7.4%. The latter forecast was about the same as in January.
Regarding inflation, there was an upward revision of the lower bound of the expected range for each year till 2014, while the upper boundary remained at 2% (objective). For 2012, the lower boundary was revised to 1.9% from 1.4% to 1.6% from 1.4% in 2013 and from 1.6% to 1.7% in 2014.
Concluding, collectively, the FOMC governors were modestly more optimistic about near term growth and unemployment and slightly more pessimistic on inflation.
However, these 2012 revisions were in fact largely offset by some downward revision of their 2013/14 growth projections.
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