While markets accepted the fact the risks to growth and inflation were still tilted to the downside, no less than Charles Evans, President and Chief Executive Officer of the Federal Reserve Bank of Chicago, suggested repeatedly in recent weeks
that he could support a taper.
Instead, “the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its
purchases.” The statement removed the binary option to increase or decrease purchases so we know the next move is to “moderate the pace of asset purchases”.
The criteria now is “at its coming meetings” (meaning not just those with a press conference and projection materials), the Committee will judge “whether incoming information continues to support the Committee’s expectation of ongoing
improvement in labour market conditions and inflation moving back toward its longer-run objective.”
Well, it reset those longer-run objectives today.
Longer-run GDP growth is now deemed to be between 2.2% and 2.5%, compared to 2.3% to 2.5% in the last five
projections. The longer-run unemployment rate is now 5.2% to 5.8%, down from 5.2% to 6.0% in the last eight projections.
Since there was no taper, there was no change to forward guidance.
The Committee continues to anticipate that the exceptionally low target range for the Fed funds rate “will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Overlaying the economic projections, the unemployment rate stands a good chance of reaching the Fed’s numerical target in 2014 but core PCE does not. And it does not in 2015 or 2016 either.
The bar to taper is now higher than 95% of the market believed. We believe the Fed squandered a golden opportunity to meet market expectations and expended both credibility and capital at a time when they are in decreasing supply.
