United States: Fed postpones tapering, keeps policy rate unchanged again
October 30, 2013
At its policy meeting on 29-30 October, the Federal Open Market Committee (FOMC) announced once again that it would wait for more evidence of sustained economic progress before making adjustments to its asset purchase program. Following the same tone as in previous statements, the Fed emphasized that, even though the economy has, "continued to expand at a modest pace," it will maintain its monthly purchases of USD 45 billion of long-term Treasury securities and USD 40 billion of mortgage-backed securities to promote ongoing economic recovery. Earlier this year, Fed chair Ben Bernanke hinted at a possible tapering of the program in 2013, but he has since pulled back and it looks increasingly likely that the decision to do so will be left to his successor. President Obama's nominee Janet Yellen is widely expected to be confirmed to the post and would take office in February 2014.
According to the Fed, the labor market has shown further improvements in recent months, though it did acknowledge that unemployment remains high. The Fed also pointed out that household spending and business fixed investment have strengthened, but that the housing sector has slowed in recent months. Moreover, tightened fiscal policy is "restraining" economic growth. The Fed plans to continue monitoring economic data in order to determine the right time to start tapering off asset purchases.
The FOMC announced that the federal funds rate target would remain within the current range of between 0.00% and 0.25%. The Fed believes that the low range is appropriate as long as the unemployment rate remains above 6.5%; short-term inflation is no more than half a percentage point above the Committee's 2.0% goal; and long-term inflation expectations remain well anchored. In terms of price developments, monetary authorities explained that inflation continues to be, "somewhat below the Committee's longer-run objective," while adding that long-term inflation expectations have remained stable. The Fed anticipates that inflation will, "move back toward its objective over the medium term."
FocusEconomics Consensus Forecast panelists expect the Fed to remain on hold this year and next, with the federal funds rate averaging 0.18% in 2013 and 0.19% in 2014.
Author: Carl Kelly, Economist