United States: Fed keeps policy rate unchanged, but conference unveils more details on Bernanke's intentions
June 19, 2013
At its policy meeting on 18-19 June, the Federal Open Market Committee (FOMC) reaffirmed its monetary policy stance. The FOMC statement was mainly unchanged from the previous policy meeting in May; however the conference following the announcement unveiled more details on the Fed's intentions going forward. In line with expectations, the statement clarified that the Fed will continue its monthly purchases of USD 45 billion of long-term Treasury securities and USD 40 billion of mortgage-backed securities, in addition to reinvesting the principal payments from its holdings. Furthermore, the Committee reiterated that it is ready to reduce or increase the pace of its asset purchases, keeping a close look at developments in the labour market and inflation.
During the press conference, Fed's Chairman Ben Bernanke announced a new definition of progress in terms of a significant improvement in the unemployment rate, setting the new threshold at 7.0%. Bernanke announced that the Fed might start reducing security purchases already this year until mid-2014, suggesting that tightening will be substantial once it begins. Accordingly, markets are currently expecting the Fed will start lowering its monthly purchases already by September this year and it will end buying in June 2014. Following expectations of a tapering of QE by the Fed, yields on US 10-year bonds have risen sharply, reaching the highest levels since September 2011.
The FOMC announced that the target for the federal funds rates will remain at the current range of between 0.00% and 0.25% at least as long as the unemployment rate remains above 6.5% and providing that long-term inflation expectations remain well anchored. Notably, the Fed now expects the unemployment rate to reach 6.5% in 2014, a year earlier than expected in its projections from March.
According to the Fed, recent data suggest that economic activity is expanding at a moderate pace and that "the downside risks to the outlook for the economy and the labour market have diminished since the fall". Monetary authorities added that the labour market has exhibited an improvement in recent months, although unemployment is still elevated. In addition, household spending, business fixed investment and the housing sector has strengthened further, however, fiscal policy is still holding back economic growth.
Regarding price developments, monetary authorities explained that inflation "has been running somewhat below the Committee's longer-run objective" while adding that long-term inflation expectations have remained stable. The Fed continues to anticipate that inflation over the medium term will "likely run at or below its 2% objective". The Committee has cut its inflation forecasts for 2013 from a range of between 1.3% and 2.0% (March) to a range of 0.8% and 1.5%. In 2014 the Bank expects inflation to range between 1.4% and 2.0% (previously expected: 1.4% - 2.1%).
FocusEconomics Consensus Forecast panellists expect the Fed to remain on hold this year and the next, with the federal funds rate at 0.19% in 2013 and 0.19% in 2014.