The Fed isn’t worried about the GDP drop, and three other takeaways from the FOMC

January 30, 2013

The Federal Reserve concluded its first policy meeting of the year Wednesday and elected to go with continuity rather than any major changes to their policy stance. Recognizing a "pause" in the economy, the Fed said the causes were temporary but that it would keep buying bonds and keep its target interest rate near zero. Here are the major developments from the latest statement by the Federal Open Market Committee:


The GDP pause is transitory, I say! (AP Photo/J. Scott Applewhite)

No panic over the drop in fourth-quarter GDP. In an unusual move, the Fed statement appeared to refer to the GDP data released the very morning of its meeting. The nation's gross domestic product dropped by 0.1 percent in the fourth quarter, according to the Commerce Department report. Later, the FOMC said that evidence since its last meeting "suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors." In other words, Fed leaders are saying: We're aware that overall growth ground to a halt, but like most private analysts, we think the causes are temporary and aren't freaking out about it.

Less risk of financial implosion, but no complacency here. Fed leaders implicitly acknowledged that since they last met in December, the successful resolution of the fiscal cliff, improvement in Europe's financial crisis, and the marked rise in the markets have meant that "strains in global financial markets have eased somewhat." But they also don't want to be caught unawares if things go south again. "The Committee continues to see downside risks to the economic outlook," the statement continued. It doesn't say so explicitly, but the possibility that Congress will allow the "sequester" of large automatic spending cuts to take effect at the start of March is likely one of those downside risks.

Continuity on policy. Perhaps it is no surprise that the Fed stuck with a policy that was  put in place only six weeks ago: The Fed will maintain ultra-low interest rates until either unemployment falls below 6.5 percent or inflation is expected to rise above 2.5 percent. And the central bank will continue buying $85 billion in securities each month to help the economy get there. There has been some debate over when the Fed might suspend those purchases, but the new statement offered no hints as to when that might be.

One new voter, one new dissenter. This was the first FOMC meeting as a voting member for Esther George, the president of the Kansas City Fed. George elected to dissent on the policy position, "concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances" and could trigger inflation. Given that this view puts her at odds with the majority of the committee, she may wind up joining the small club of members who have dissented in every FOMC meeting in a calendar year, which also includes her predecessor in Kansas City, Tom Hoenig. Three other federal bank presidents also got voting privileges for 2013: the Chicago Fed's Charles Evans, Boston's Eric Rosengren and St. Louis's James Bullard.

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Sarah Kliff · January 30, 2013