The Federal Reserve concluded its last meeting of 2013 on Wednesday and decided to taper its $85 billion per month bond-buying program. Chairman Ben Bernanke held his final scheduled press conference.
These are crucial lines from the Fed’s policy statement for understanding the Fed’s intentions with its $10 billion reduction in its bond buying program: “The Committee will closely monitor incoming information on economic and financial developments in coming months and 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. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”
Here’s h0w to read that: Yes, we’re slowing the purchases. But that doesn’t mean we’re done trying to boost the economy. We’re not on a pre-set course, and will only continue slowing the pace if the economic data matches up to our expectations. That dovish language, combined with the hawkish slowdown of bond buying, helps explain why the stock market is up since the announcement.
Over the past several months, the market has moved in lockstep with expectations about what the Fed will do. A move toward winding down QE automatically meant stocks would decline; a move to continue it further meant they rose.
The pattern seems to have been broken. The announcement that the Fed will slow bond purchases by $10 billion a month sparked a rally on stock markets, with the Standard & Poor’s 500 rising 0.7 percent and the Dow Jones industrial average up 1 percent. Markets may have been assuaged by language in the Fed statement that the central bank will continue working to support growth even as it winds down its QE policies.
All year, there has been a dissenter at Fed policy meetings — Esther George, the president of the Kansas City Fed, who has opposed the central bank’s bond-buying program on grounds that it could spur financial bubbles.
At this meeting, though, George voted in favor of the policy statement, likely because the rest of the committee moved to begin winding down the bond-buying. But there was a new dissenter, from a different direction.
Eric Rosengren, president of the Boston Fed, voted against the action, because he “believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.”
The Fed released its leaders’ projections for growth, unemployment, inflation, and their own policies in conjunction with the new policy statement.
Most of the projections were little changed, but the leaders did indicate they expect unemployment to fall faster in 2014 than they expected in September. The central tendency of their projection is for 6.3 to 6.6 percent joblessness by the end of next year, compared with the 6.4 to 6.8 percent forecast in September.
Fed officials still overwhelmingly expect interest rates hike to arrive in 2015. 12 of the 17 leaders expect rate hikes to be warranted that year, compared with 2 who view interest rate increases as justified in 2014 and 3 in 2016.
Our own Ylan Mui asks what framework the FOMC will use to decide the pace of further tapering and whether they would expect the QE bond buying to end by the summer of 2014 as Bernanke has previously indicated.
Bernanke said it is unlikely the bond purchases will be finished by summer, and are more likely to wait until the end of 2014. He expects the FOMC to taper further at each meeting assuming the economy holds up, possibly pausing if the data changes.