FOMC Action – June 18, 2013

June
19

Written by: Jon McGraw

The Federal Open Market Committee completed their meeting this morning, and the conclusion was much the same as we’ve come to expect: continued stimulus in the form of $85 billion in bond purchases a month with the same targets (6.5% unemployment assuming no higher than 2.0% inflation). However, their outlook seemed slightly more optimistic on the economy, and also contained an acknowledgement of diminished downside risks.

Although it may not feel like it, employment has been improving this year (the unemployment rate ticked up last month with better labor force participation, but still a percentage point away from the intended target) and formal inflation measures have been inching lower. At the same time, economic data has been mixed, but continues to reaffirm slow overall growth—perhaps 2.0-2.5% for 2013 real GDP and maybe a percentage point better for 2014.

In our opinion, it seems like in the Fed’s mind, the pace of the recovery is not as robust as they would like to see, and plenty of spare capacity exists, which keeps a lid on conditions overheating and necessitating a more restrictive stance sooner than later. Hence the continued QE.

The ‘taper talk’ of when the Fed may pull off the gas pedal has spooked markets in recent weeks to some extent, the backdrop of which is somewhat multi-faceted and even ironic. On one hand, tapering off stimulus relays a fear that markets won’t be able to sustain themselves under their own power, without the Fed; on the other, it conveys confidence that the economy is strong enough to grow on its own (a long-term positive, but this also contains an embedded fear about rising interest rates).

Either way, the markets – both stock and bond – sold off on the news.

With Chairman Bernanke’s current term concluding in 2014 (and hints from the President that he’s stayed longer than he expected to), some talk has already begun about a potential replacement. It could possibly be current Vice Chair Janet Yellen, or perhaps another friend of the administration, such as Lawrence Summers, who has been an economic advisor to the current administration as well as Treasury secretary under Clinton.

Bottom line: we’re at status quo, but that can’t continue forever.