Fed Adds Little to QE3 Debate
- 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.
This afternoon, the Federal Reserve’s Federal Open Market Committee reaffirmed its highly accommodative policy and provided no additional information about the timing of the eventual unwind of its asset purchase program known as QE3. The Fed will continue to purchase $40 billion worth of agency MBS and $45 billion of longer-term Treasurys per month. The Fed also made no changes to its fed funds rate policy. The funds rate target will continue to be between 0 and 0.25 percent at least as long as the unemployment rate remains above 6.5 percent. As of June, the U.S. unemployment rate was 7.6 percent. Friday morning the July employment report will be released and is expected to show a minor decrease in the unemployment rate to 7.5 percent. Given the Fed’s current language, it appears that the funds rate will not be lifted until sometime in 2015.
Today’s Fed announcement did reflect the downward revision to recent GDP data, saying that economic activity expanded at a modest pace in the first half of the year. It also gave a nod to St. Louis Fed President Bullard’s concern about the possible downside risks of persistently low inflation. Other than that, there was no significant change from the June 19 announcement. President Bullard changed his vote from dissenting in the June 19 policy announcement to affirming today. Kansas City Fed President Esther George delivered the sole dissenting vote today. She remains concerned about an increase in long-term inflation expectations.
The Sphinx-like nature of recent Fed announcements may be contributing to market uncertainty. Today’s announcement contains no language reflecting statements that Chairman Bernanke has already publicly made about his desire to begin the wind down process for QE3 by the end of this year. Industry expectations still focus on the upcoming September 17/18 FOMC meeting as the launching point for QE3 calibration, but that is by no means certain. Today’s better-than-expected GDP report for Q2 and better than-expected July ADP report obviously did not induce the fed to reveal more about its asset purchase intentions. The decision to dial down QE3 will be data dependent. A strong jobs report for August (issued on September 6) would increase expectations for a mid-September policy change. Also, given the certainty of a new Fed chairperson in 2014, the Fed’s forward guidance may be modified in advance of reaching current thresholds.
The leading candidates for the FOMC chair appear to be Janet Yellen and Larry Summers. Yellen is expected to be very dovish in her policy stance, likely keeping accommodative policy longer. Summers has made public statements doubting the efficacy of quantitative easing and may be viewed as slightly less dovish, but certainly not hawkish.
Market Reaction: U.S. equity markets dipped after the announcement was released at 2pm Eastern Time, but quickly recovered. Treasury yields are easing at the long end of the yield curve after increasing this morning. WTI crude oil is up to $105.23/barrel. The dollar is easing against the euro and the yen.
For a PDF version of this Comerica Economic Alert, click here: FOMC 073113.