Thursday, August 1, 2013

The FOMC & GDP (excerpt)

All in all, the FOMC didn’t change the message much at all from the previous one dated June 19. Despite widespread expectations that QE will be tapered at the next FOMC meeting in September, the latest statement simply indicated that the Fed will continue to buy $85 billion in Treasuries and Agencies but will either increase or decrease this pace “as the outlook for the labor market or inflation changes.”

There was no change in the forward guidance on how long the federal funds rate will remain near zero. The unemployment threshold for starting to discuss the possibility of tightening monetary policy remains at 6.5%. There was no hint that a lower jobless rate, such as 5.5%, was even discussed. Nor was there any hint that the FOMC is considering a threshold for the inflation rate.

On balance, the FOMC statement was more dovish than the previous one. That simply reflects the fact that monetary policy is data dependent. The data that were released yesterday showed weak GDP growth and near-zero inflation. Indeed, nominal GDP was up only 2.9% y/y during Q2, the lowest since Q1-2010.

I suppose that all this lowers the odds of QE tapering starting at the September meeting. However, I hope that there was some discussion at the latest meeting about why the economy is so weak given so much QE. Since the latest program was started on September 13, 2012, the Fed’s balance sheet has increased by $751 billion to a record $3.5 trillion.

Today's Morning Briefing: From Moderate to Modest. (1) FOMC downgrades economic growth. (2) BEA does the same to GDP. (3) Slower than the much-dreaded “stall speed.” (4) Obamacare: Two part-timers for the price of one full-timer less benefits. (5) FOMC indicates inflation is too low. (6) No change to QE or forward guidance, but statement is more dovish. (7) QE certainly isn’t doing much for GDP. (More for subscribers.)

No comments: