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| Posted Under: Government • Inflation • Research Reports • Fed Reserve • Interest Rates |
If the Fed had made any major news today, it would have been by accident.
Only a few takeaways from today's meeting.
First, this month's Federal Reserve policy statement was almost a carbon copy of the last one (from April). As the world expected, the Fed will keep tapering, cutting another $10 billion from its monthly purchases. The Fed will buy $35 billion in bonds during July, and it looks like the Fed will be done with quantitative easing in late October. The statement included a more positive view of business investment.
Second – the economic outlook. The Fed recognized the weakness in the first quarter and attributed it to weather ("transitory factors," is what Chair Janet Yellen said in the press conference). Outside the first quarter, the Fed's real GDP growth outlook remains essentially unchanged. Its forecast for the unemployment rate is slightly lower but, we think, still too high. The Fed has the jobless rate finishing the year at about 6%; we think it's likely to get below that level.
Third, the Fed made some subtle, but important changes to its interest rate projection. Back in March, the consensus of Fed members said the long-term neutral level of the federal funds rate was 4%; that's now down to 3.75%. But, in the short-term, Fed members raised their forecast for the federal funds rate at the end of 2015 from 1% to a range of 1 - 1.25%. The median forecast for the end of 2016 went to 2.5% from a prior 2.25%. In other words, the Fed hinted at lifting rates a little faster than it had previously indicated, but holding them lower over the long-run. If there was any reason for the market to cheer today, it was this less aggressive longer-term posture.
This all follows our expectations that the Fed will accept higher inflation in the longer-run than its current 2% target suggests. Fed policy is easy, the Fed is making a commitment to keep its balance sheet larger for longer, and it sees no real urgency to raise rates. All of this will create a boost for markets and the economy over the next 12-24 months. Inflation, growth and stock prices will move higher than the consensus expects. And we still think the bond market does not appreciate the danger it faces. While it may not appear like it today, the Fed is falling behind the curve.
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