Fed Holds the Line, Hints at Policy Changes

In its first meeting with Janet Yellen as the chairperson, the Federal Reserve surprised few by continuing the direction on rates and tapering set out during the final months of her predecessor, Ben Bernanke. But the tone of its March 19 statement did intimate some movement could be coming in at least one of those areas and that some at the Fed are deeply concerned with moving targets.

The Federal Open Market Committee (FOMC) found that, despite economic growth rates slowing during the winter months – blamed almost entirely on historically bad weather in several regions, “there is sufficient underlying strength in the broader economy to support ongoing improvement” in areas including growth and labor conditions. As such, the FOMC opted to continuing pulling back on its stimulus by a total of $10 million in two areas: from $30 billion to $25 billion per month in agency mortgage-backed securities purchases and from $35 billion to $30 billion per month in adding longer-term Treasury securities.  The Fed statement predicted it would continue the tapering should conditions stay in line with expectations, but they also left enough vague text to hint at a change in the rate of asset purchase reductions: “Asset purchases are not on a preset course.”

The FOMC also left the target for the federal funds rate untouched at a range between 0% and 1/4%. What is notable is that the Fed, under Bernanke, had said it would likely begin raising the level once unemployment fell to 6.5%. It has dropped to a lower-than-expected 6.75%. As such, the Fed has changed the language of it guidance to note that it should be expected that the target for the federal funds rate will no longer be moved at that point and that, rather, various economic condition “may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal.”

All but one FOMC member, Narayana Kocherlakota, voted in favor of the actions. Kocherlakota believed some of the policy actions and wording, especially on rates, “weakens the credibility of the Committee’s commitment to return inflation to the 2% target” and “fosters policy uncertainty that hinders economic activity.”

- Brian Shappell, CBA, CICP, NACM staff writer

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