My colleague David Kotok has already commented on the FOMC’s most recent decision with respect to the path for tapering its asset purchase program. It is now obvious that unless the FOMC chooses to have inter-meeting phone meetings, we will see changes, if at all, only following an FOMC meeting. If the present pace of tapering were to continue for the duration, then we would expect Treasury purchases to be completed by about January 2015 and MBS purchases by about March or April of 2015. That seems like a very long and drawn-out process and would still result in the Fed’s portfolio increasing by as much as $380 billion. If the economy continues to improve, then it is more likely that the $5B incremental pace of tapering will be increased, and the path to end the program will either be speeded up or simply truncated.
The Trigger
Perhaps the more interesting aspect of this most recent FOMC statement, however, is language that appears to be downplaying, if not totally abandoning, the idea that achieving a 6.5% unemployment rate will serve as the trigger for evaluating whether to begin backing off from the Fed’s accommodative zero interest-rate policy. The statement clearly indicates that the headline number is not the only indicator – and perhaps now not even the most relevant indicator – of labor market conditions. What is being substituted in place of a number is panoply of different, but unspecified, indicators of labor market conditions that the Committee may now regard as being relevant to its policy deliberations. Further, with inflation far below its 2% target, the Committee clearly states that it will continue its accommodative policy “…well past the time that the unemployment rate declines below 6-1/2…”
What this new statement suggests is that market participants should no longer view the 6.5% unemployment rate as a meaningful or relevant indicator. At the same time, no other specific benchmark indicator has been provided, and we are offered only a vague reference to “labor market conditions.” From a communications perspective, the FOMC has once again introduced more ambiguity when it comes to the market’s ability to put reasonable parameters on when the Committee will begin to change policy. So much for fine-tuning the Committee’s communications strategy.
Bob Eisenbeis, Vice Chairman & Chief Monetary Economist, email: bob.eisenbeis@cumber.com