United States: Fed surprises markets, postpones tapering and keeps policy rate unchanged
September 19, 2013
At its policy meeting on 17-18 September, the Federal Open Market Committee (FOMC) announced that, despite the, "growing underlying strength in the broader economy", it would wait for more evidence of sustained progress before making adjustments to its asset purchase program. The Fed emphasized that the economy has continued to expand at a modest pace, which is in line with previous statements that led many market analysts to expect that scaling back would begin in September. Instead, the Fed will maintain the pace of its monthly purchases of USD 45 billion of long-term Treasury securities and USD 40 billion of mortgage-backed securities. The Fed is confident that this decision will support accommodative financial conditions and promote ongoing economic recovery.
According to the Fed, recent indicators suggest that the labor market has shown further improvements in recent months, although it acknowledged that unemployment is still high. While household spending, business fixed investment and the housing sector have strengthened, rising mortgage rates and tightened fiscal policy are holding back economic growth. The Fed plans to continue monitoring economic data in order to determine the right time to begin 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% goal; and long-term inflation expectations remain well anchored. In terms of price developments, monetary authorities explained that inflation continues to run, "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." The Committee has raised its inflation forecasts for 2013 from a range of between 0.8% and 1.2% (June) to a range of 1.1% and 1.2%. In 2014 the Bank expects inflation to range between 1.3% and 1.8% (previously expected: 1.4% - 2.0%).
FocusEconomics Consensus Forecast panelists expect the Fed to remain on hold this year and the next, with the federal funds rate averaging 0.19% in 2013 and 0.19% in 2014.
Author: Carl Kelly, Economist