No Taper in June, Language a Little More Positive
- QE3 will continue as originally defined with a total of $85 billion of asset purchases per month.
- The FOMC is prepared to change the pace of purchases as conditions change.
- The near-zero fed funds rate remains linked to an unemployment rate threshold of 6.5 percent.
- The FOMC will continue to tolerate inflation expectations of up to 2.5 percent.
In today’s monetary policy announcement the Federal Open Market Committee released a statement that keeps most of the language that has been in place for months. Financial markets were looking for clues about when the tapering process for QE3 would begin. Those clues were entirely absent from today’s written announcement. For now, the Fed will maintain its current program of asset purchases, known as QE3, to the tune of $85B per month.
The few minor tweaks to today’s policy announcement were positive. Labor markets have shown further improvement. Downside risks to the outlook….(have) diminished. Also, the current low rate of inflation is seen as partly reflecting transitory influences.
In his post-meeting press conference Chairman Bernanke did provide some important additions to the written announcement. The Chairman confirmed that the committee is discussing the broad principles that will define its overall monetary policy exit strategy. Those principles have been in place since June 2011. Today, Chairman Bernanke stressed that the Fed would not sell mortgage-backed securities as part of its exit strategy. In that way, the exit from extraordinary monetary policy does not automatically result in a headwind against home sales. Also, the Chairman reinforced the idea that the 6.5 percent unemployment rate threshold, established as a benchmark for fed funds rate policy, is just a threshold. If inflation remains contained, then it should be expected that the Federal Reserve will keep the fed funds rate near zero well beyond the time the unemployment rate threshold is crossed. Bottom line…we may see near-zero interest rate policy extend well into 2015, if not longer. Finally, the Chairman did hint that the FOMC would like to begin the “calibration” of QE3 before the end of this year.
Market Reaction: U.S. equity markets dipped through Chairman Bernanke’s press conference. Treasury yields went up at the long end of the yield curve. Crude oil is down to $98.47/barrel. The dollar strengthened against the euro and the yen.