FOMC aftermath: No changes, weather blamed
The Federal Reserve’s Open Market Committee concluded its two-day meeting and released a press statement (no press conference was scheduled). Some expectations had built that the Fed would introduce specific thresholds to its quantitative easing (QE) programmes, in addition to its unemployment threshold, as the minutes from the previous meeting showed earlier that the majority of the FOMC members expect the central bank to start easing up on its purchases later this year. At some point, the Fed will decrease its monthly purchases from the current USD 45 bn of treasuries and USD 40 bn of mortgage-backed securities. The question is when.
No QE thresholds, weather blamed
We saw no QE thresholds yet, only a repeat that “The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.”
More importantly, the bad Q4 GDP print was blamed on the weather and other incidentals – so bulls hoping for more fuel from the Fed were obviously disappointed. The statements for December and January can be viewed on the Fed’s website.
It looks like yesterday's FOMC changed nothing – but that also means that what was stated in December holds for now. One dissenting member voted against the decision: Esther George was “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations”
Exit plan, soon
So what will be the Fed’s exit tactics? When the policy goals are approaching, will they signal rate hikes or decrease or even halt QE? My guess is that they would like to decrease the asset purchases first, as they are viewed as much more problematic than the near-zero interest rates. Probably inflation and jobs are not the only things they watch – bond yields and signals from abroad (Europe, mostly) are also important. The current policy is very much open for interpretation.
The markets will be kept in uncertainty over the QE’s longevity and some sort of clarification will sooner or later come from the Fed. This leaves everyone scrutinising Friday’s unemployment report for the trend that takes us to the targeted unemployment level of “at least 6.5%”. Approaching the destination will at least force the Fed to reveal its plan for landing the QE-plane. The fuel (balance sheet toleration) is running out, the destination is approaching (unemployment level) and the crew is getting restless (growing dissent, end of Bernanke’s term). The Fed will have to land soon, so fasten your seatbelts.