FOMC Meeting: Dovish Message Repeated‏

The Fed's asset purchases will continue at its current USD85bn pace for now; the first Fed funds rate hike is not expected before 2015.

Ben Bernanke repeated his dovish message, but acknowledged the past five months' improvement in the labour market.

If the current improvement proves sustainable, the FOMC will scale down its asset purchases. We expect this to happen in Q4 this year.

There was limited information on what the review of the asset purchase program indciated, but we will get more information with the minutes in three weeks' time.

Details and assessment
There were only minor changes to the wording of the statement compared to January. The recent improvement in economic data was acknowledged, but fiscal policy was seen as more restrictive following the sequester, and the FOMC continues to see downside risks to economic growth. The most important change is, in our view, the following amendment to the QE paragraph:

In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

This is to remind markets that if the current progress in the labour market continues and the outlook remains bright, the FOMC will scale down its pace of asset purchases. This was also the message from Bernanke at the press conference: the trigger for scaling down purchases is that the labour market improvement is sustainable. We expect this to be the case when we enter into the last quarter of the year and look for the FOMC to scale down purchases around that time.

Turning to the economic projections, the FOMC’s unemployment projections were lowered, but unemployment is expected to be above the 6.5% threshold into 2015. This is in line with the rate projections, which show that a majority of the FOMC expects the first Fed funds rate hike to be at least two years down the road.

In terms of inflation, the FOMC projects that PCE inflation will remain below its 2.0% long run target for the entire forecast period. Hence, the binding threshold for raising the fed funds rate will be the unemployment rate.

Esther George from Kansas Fed dissented again, as she is concerned about the risks from further asset purchases on financial imbalances and inflation expectations.

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