Friday, April 25, 2014

FOMC Report April 29-30, 2014



Views at the Federal Reserve about the impact from severe winter weather on economic growth in Q1 2014 seem to change with the wind.  Upon the emergence of weaker economic data following harsh weather constraints, Fed officials were quick to recognize the negative impact from weather.  In the ‘Beige Book’ leading to the March FOMC meeting, reports of economic progress were upbeat; ‘Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February.’  However, where instances of slower growth were reported, weather was cited as causal; ‘New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions.’

By the time the Fed had met a few weeks later for the March FOMC meeting, staff economists had seemingly tired of the notion that weather was a primary contributor to weaker economic growth; ‘The information reviewed for the March 18-19 meeting indicated that economic growth slowed early this year, likely only in part because of the temporary effects of the unusually cold and snowy winter weather.’  By using the qualifier ‘only in part’ the Fed Staff indicated a growing concern that underlying conditions had deteriorated.

Finally, on April 16th Chair Yellen addressed the Economics Club of New York to discuss ‘Monetary Policy and the Economic Recovery’ noting; ‘The FOMC's current outlook for continued, moderate growth is little changed from last fall. In recent months, some indicators have been notably weak, requiring us to judge whether the data are signaling a material change in the outlook. The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather related.’

The Fed has come full circle on their view of weather impact on growth over the last months, accepting now that it has been ‘significant’.  When they meet on April 29-30, the Fed will have the benefit of additional generally stronger economic data since the Beige Book was prepared at the Federal Reserve Bank of Richmond and based on information collected before April 7, 2014.  Employment data has shown some improvement as has retail sales, confidence, industrial production and capacity utilization, leading indicators and most recently durable goods.  Additionally, inflation data was finally slightly higher than expected in March CPI and PPI reports.  Regional Fed banks indexes reporting on manufacturing and general conditions improved in Philadelphia, Chicago, Richmond and Kansas, but was reported softer early in the period by New York (Empire State). 

Despite generally improved economic data the Fed is expected to follow earlier articulated guidance concerning its purchase plans; ‘will likely reduce the pace of asset purchases in further measured steps at future meetings.’  The level of securities purchased on a monthly basis will thus likely be reduced by $10B to $45B starting in May, a fourth similar reduction.   We should also expect no change to the qualitative guidance on the policy rate.   

Chair Yellen provided a soft reference or definition for ‘considerable time’, as in; ‘that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.’  While Yellen suggested at the March FOMC post-meeting Q&A that ‘considerable’ might be roughly 6 months, we know to use this only as a rough guide and only if growth, employment, inflation and financial market conditions are consistent with projections.   

The Fed has been using some form of general period, date specific or threshold conditional policy rate guidance since the December 16, 2008 FOMC meeting where they indicated; ‘The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.’ 

Since then, the Fed had used the guidance language ‘extended period’ to describe the likely time policy rates would be held at extremely accommodative levels until it moved to date specific language in August 2011; ‘are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.’

After extending that reference date to ‘late 2014’ in at the January 2012 FOMC meeting and then to ‘mid-2015’ in September of 2012, the Fed switched over to ‘Evan’s Rule’ - threshold guidance in December 2012, holding that language for a little over a year until the March 2014 meeting. 

The Fed is now using a softer ‘considerable time’ reference as it relates only to the period following the completion of the asset purchase program largely expected to end in October this year.  Of course, inflation needs to be found moving toward the 2% target before the Fed will commit to removing accommodation, but we find it curious that the Fed had removed from its March 2014 FOMC statement the necessity for stronger growth as specific requirement before reducing accommodation. 

The March 2014 FOMC Statement notes; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.’  However, since December of 2012, this particular statement had always concluded with the reference; ‘that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’  Even before the December 2012 FOMC meeting statement referenced the purchase program, the September and October of 2012 statements referenced a period beyond recovered economic strength; ‘that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.’

Later in the March ‘14 FOMC statement the Fed did mention a post-purchase period for continued highly accommodative monetary policy.  However, they dropped the reference to growth and added only reference to hoped-for improved inflation conditions; ‘The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.’  By indicating that the highly accommodative stance is appropriate ‘especially if’ projected inflation continues to run below…, the inflation condition can be read as an ideal state and not particularly a requirement before the Fed can decide to reduce accommodation.

For a very long time, the Fed has indicated that the highly accommodative policy stance should be expected to continue well beyond the time the economic recovery strengthens.  This has been removed in the March Statement.  It may be assumed, but it is not stated and it’s absence could be considered as a step toward removing barriers to lowering levels of accommodation.  The statement as it has been changed to now references policy appropriateness in the present and has thus reduced forward guidance.  Intended or not, this is how we should read that change.  Below find the aforementioned statement from present through the September 2012 meeting:    

Mar ’14 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.’

Jan ’14 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Dec ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Oct ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. ‘

Sep ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

July ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Jun ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

May ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Mar ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Jan ’13 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Dec ’12 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

Oct 12’ FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.’

Sep ’12 FOMC; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.’  




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