The Federal Reserve’s Open Market Committee accelerated the taper a bit, even as they downgraded their forecast for GDP growth this year, according to their announcement released this afternoon.
The central bank will continue to add to its balance sheet by purchasing Treasuries and GSE-backed mortgage securities, but will now fill up their monthly market basket with $35 billion worth of bonds instead of $45 billion.
Now, this may have you scratching your noggin a bit: if they think growth this year is going to be significantly slower than they thought before (see figure), why are they doing less?
Source: Federal Reserve
Well, for one, they’re always trying to see around the next corner and they think things are generally looking up since that dismal read on Q1 GDP of -1%. They like the steady payroll jobs growth, diminished fiscal drag, deleveraged households, appreciated home prices. Though their statement continued to worry about an inflation rate below their 2% target, I wouldn’t doubt that recent accelerated core CPI readings have raised an eyebrow or two over there.
For another, they could be wrong. That is, if you’ve consistently overestimated future growth rates, as has the Fed (along with many others) have, you might consider now an awkward time to decelerate your support for the economy. There’s still ample slack in the job market and related flatness in wage trends such that letting up on the accelerator is not the obvious move.
That said, while I certainly think the above is a cogent argument, I don’t think $10 billion less in asset purchases will make much difference in the movements of the longer term rates they’re targeting with this part of the program.
Basically, the Fed is deep into “one-the-one-hand-on-the-other-hand” territory and IMHO there’s not a ton to see in the press release and accompanying forecasts beyond that. Chair Yellen takes solace in the view that “economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter.” But I think the economy needs to run hotter for awhile to close persistent output gaps before settling into the Goldilocks zone.
Some analysts are making a big deal out of the fact that if you look at the dot chart you can see that some of the participants have lowered their forecast of the neutral rate from 4% to a little below 4%.
I look at the dots and I see…well, here’s what I see:
I’d argue that’s one of the more informative looks at these data I’ve seen today, but you be the judge.