The Federal Reserve’s Federal Open Market Committee (FOMC) broke from its two-day economic policy meeting Wednesday with surprising news that it would not slow down on its asset purchase stimulus program despite some evidence of strengthening in the economy.
Kevin Hebner, senior foreign exchange strategist for JPMorgan Chase Bank, was among many experts expecting the Fed to start tapering. While speaking at a Tuesday session of the 24th Annual FCIB Global Conference in Philadelphia, Hebner said it was possible, as early as Wednesday and surely in the near future, that the Fed would reduce about $10 billion from the $85 billion per month it has been spending on Treasury and mortgage-backed securities, given improvements in some key economic indicators. The FOMC, however, noted in its official statement that there are ongoing concerns with unemployment rates and escalating mortgage rates, along with “restraining” fiscal policy. As such, the purchase strategy, like the target for the federal funds rate, remained unchanged. Chairman Ben Bernanke indicated during a press conference that the Fed wants to see more improvement, especially “meaningful progress” in labor markets, and in more of a widespread, consistent manner, before the Fed changes course.
While many will focus on the asset purchase issues, Hebner said even more important was that Wednesday’s meeting included the first release of projections for 2016 by the Fed. To wit, the FOMC predicted growth of 2.2% to 3.5%, about on pace with projections for 2015 but well below the 4% Hebner said would constitute a better-than-“neutral” outlook. The prediction for overall 2013 GDP was 1.8% to 2.4%, according to Fed statistics. Unemployment was projected at a range of 5.2% to 6% for 2016, also very close to that of 2015, although it would still be a significant improvement from the 2013 projection of 6.9% to 7.3%.
“This is the most important FOMC meeting in at least a year or so,” said Hebner. “And it could be hard for people to make sense of it all.” Despite eventual tapering, Hebner predicted no hikes to the federal funds rate before 2015 in part because of continued issues in the labor market. Therein, the Fed left the target for the federal funds rate at a range between 0% and 0.25%. At least that much was widely expected.
-Brian Shappell, CBA, CICP, NACM staff writer