Fed Watch: Z-z-z-z-z-z-z
As dramatic as the Fed’s market intervention has been over the past four years—it has tripled the size of its balance sheet and held the benchmark funds rate effectively at 0% since December 2008—it’s becoming old hat. That was evident today when the stock and bond markets hardly reacted at all when Fed policymakers this afternoon said they were sticking with all-in accommodation in an effort to prop up growth, drive down unemployment and provide a backstop to fiscal policies that the central bank deemed to be somewhat restrictive.
There were a few tweaks in the policy language. Federal Open Market Committee (FOMC) members did upgrade their description of the labor market, saying it has shown signs of improvement, a likely nod to the higher run rate on nonfarm payrolls and the sustained decline in unemployment insurance claims. At the same time, however, the policy-setting committee reiterated that unemployment remains elevated, and expressed worries about sequestration’s potential negative impact on growth by saying “fiscal policy has become somewhat more restrictive.’’ The job-market improvements and fiscal concerns were captured by the FOMC’s revised longer-term jobless and GDP forecasts, each of which was lowered slightly.
In the end, the FOMC found no reason to revise its monthly purchases of $85 billion of longer-term Treasury and agency mortgage-backed securities, and did not put any potential end date for this latest round of quantitative easing initiated late last year. It also repeated that it will adhere to its 0% to 0.25% federal funds target as long as the unemployment rate remains above 6.5% and projected inflation runs no more than a half point above its 2% target, benchmarks that based on its latest forecast would suggest no change in the target rate until deep into 2015. As was the case at the last meeting in January, Kansas City Federal Reserve Bank President Esther George was the lone dissenter, saying potential imbalances created by the high level of monetary accommodation could drive up inflation expectations.