Redacted Version of the May 2013 FOMC Statement

March 2013May 2013Comments
Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year.Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace.No real change
Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated.Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated.No real change
Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive.  Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.Shades their view on fiscal policy down, arguing that it is restraining growth.
Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices.  Longer-term inflation expectations have remained stable.Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.No change.  TIPS are showing falling inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is down near 2.65%, down 0.2% from March.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.No changeEmphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
The Committee continues to see downside risks to the economic outlook.The Committee continues to see downside risks to the economic outlook.No change
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.No change. CPI is at 1.5% now, yoy.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.  The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.No change.Does not mention how the twist will affect those that have to fund long-dated liabilities.

Wonder how long it will take them to saturate agency RMBS market?

Operation Twist continues.  Additional absorption of long Treasuries commences.  Fed will make the empty “monetary base” move from $3 to 4 Trillion by the end of 2013.

 

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.The Committee will closely monitor incoming information on economic and financial developments in coming months.No change. Useless comment.
The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.No change.
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.New sentence. Makes more explicit what they say in the next two sentences – not really needed.
In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.No change
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.No change.Promises that they won’t change until the economy strengthens.  Good luck with that.
In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.Not a time limit but economic limits from inflation and employment.Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2014, is currently 2.25%, down 0.07% from March.  Here’s the graph.  The FOMC has only 0.25% of margin in their calculation.

 

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.No change.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.No change
Voting against the action was Esther L. George, who 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.Voting against the action was Esther L. George, who 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.No change

 

Comments

  • Notable: they take issue with fiscal policy being too restrictive.  And this is with near-record deficits.  What do they want, larger deficits so they can do more QE?  The relationship between the Fed and the Treasury is already co-dependent enough.
  • Not so notable, this new sentence: The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.  Not really needed, because it is implied in what follows the sentence.
  • Aside from that, this FOMC Statement was a nothing-burger.
  • I really think the FOMC lives in a fantasy world.  The economy is not improving materially. Also note that the CPI is close their 2.5% line in the sand.  TIPS-implied inflation 1X1 (one year ahead for one year) is 2.25%, and 5X5 is around 2.65% annualized.
  • Current proposed policy is an exercise in wishful thinking.  Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn’t work, what will they do?
  • Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

4 Comments

  • Doug says:

    David, how are you totally discounting present measures of inflation? How can you say that inflation is rising? By your own comments, CPI is 1.5% year-on-year. And core-CPI is steady at 2%, and has been for the past 2 years.

    On the bear side, PCE inflation (which adjusts for substitution) is running at 1%, and core PCE inflation is trending down. The last report was especially bad, but 1% PCE has been pretty normal for a while.

    I’m not beating the deflation drums, but the TIPs forward/forward calculation can be distorted by a lot of things: available bonds, liquidity preferences, ISDA collateral contracts, etc. All that money hasn’t created inflation yet.

    • Doug, that was an accident. I don’t change all my verbiage every period. That one slipped through, whereas I removed the same in 1-2 other places. Sorry, and the post has been appropriately modified. Thanks for pointing this out.

      I realize that there can be other adjustments made on TIPS, and if I had a Bloomberg terminal, I could run my full scale implied inflation model. But I don’t so I can’t. Even the Fed uses their smoothed numbers for their calculations, as do I.

  • Brent Buckner says:

    The Fed’s 2% medium-term inflation target and the 2.5% “line in the sand” are respective of headline PCE.

    In February 2012 Cumberland emphasized the point and drew implications:
    http://www.cumber.com/commentary.aspx?file=020612.asp

    • CPI is bogus, but not as bogus as PCE. I realize the Fed uses PCE, which has been tracking closer to CPI of late, but the Fed always favors measures that minimize the measurement of inflation. CPI understates goods price inflation by ~1-2%/year, PCE more.

      That said, there are no ways to calculate forward PCE expectations — there are ways to do it for CPI-U.