The Federal Open Market Committee is not going to stop quantitative easing just yet. This is no surprise considering the weak economic conditions and as we pointed out, an inflation rate below expectations. The risk of deflation is real.
The Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.
The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
Don't bank on the Fed stopping quantitative easing by December either as we pointed out. They are continuing to assess market conditions and are basing the decision on sustainable increases in labor market conditions and wanting to see the inflation hit the 2.0% annual target.
Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
The FOMC also released their new economic projections and notice how the PCE index is below the Federal Reserve 2.0% annual target rate. In other words, they expect inflation to be too low for the short term.
Graphed below is the PCE price index, in red, scale on the left, and the PCE price index minus food and energy in blue, scale on the right. This is the percent change from one year ago. We are seeing low inflation similar to the deflationary period of 2008, caused in part by the Great recession and a massive drop in global economic demand. For those watching quantitative easing, you might take a look at this article on the Fed's concern for potential deflation Think about these low inflation numbers while the Fed is buying every Treasury bond and mortgaged backed security in sight. If quantitative easing ends, assuredly inflation will decrease.
Additionally contemplate the Fed buying up mortgage backed securities, yet the residential real estate market is cooling down. Bernanke also mentioned the tightening of financial conditions, which are easily visible in revolving consumer credit reductions.
There was a lot of discussion on the labor participation rate, which is at record lows, 63.2% and has dropped 0.3 percentage points in the last year. The low labor participation rates implies people are simply dropping out of the count, not being able to gain employment. The unemployment rate will go down when people simply drop out of the labor force. During the press conference, Bernanke amplified this fact, although had hope in the next year things would be different, although the sun will come out tomorrow economically is now a repetitive half a decade song being sung by policy makers.
To say that the job market has improved does not imply that current conditions are satisfactory. Notably, at 7.3 percent, the unemployment rate remains well above acceptable levels. Long-term unemployment and underemployment remain high. And we have seen ongoing declines in labor force participation, which likely reflects discouragement on the part of many potential workers.
The Federal Reserve is now getting some flak over not stopping the asset purchases and this is most amusing, for the press and Wall Street tried to nail the date, the Fed always stated the conditions were inflation and labor market conditions. Wall Street watching just the unemployment rate for the Fed to wind down their quantitative easing is one of the reasons they were so wrong in assuming tapering would be announced this month by the FOMC.
Needless to say, the FOMC kept the federal funds rate unchanged and is much more explicit on their criteria to justify a rate increase.
the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. 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 and inflation of 2 percent.
A question in the press conference asked about the debt ceiling shenanigans Congress likes to pull. Bernanke called this an economic shock to not raise the debt ceiling and called on Congress to be responsible. The press conference opening statement has a gem on how badly the sequester hurt the economy, not amplified of course by Wall Street, which cut into the employment gains referenced.
Federal fiscal policy continues to be an important restraint on growth and a source of downside risk.
Importantly, these gains were achieved despite substantial fiscal headwinds, which are likely slowing economic growth this year by a percentage point or more and reducing employment by hundreds of thousands of jobs.
Once again Bernanke called on Congress to address income inequality, noting much of policy is under the control of Congress and this administration that could really help the middle class. Needless to say that ain't gonna happen soon, Congress has abandoned helping the middle class economically. So, quantitative easing continues and tapering for September is a no-go.