I wrote about what I thought was a main factor in the decision to start the taper in December here. In that post I mused that the main factor was as basic as fiscal doing more so the Fed does less. And here, in the statement, this little gem popped up:
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases.
Of course not everyone is a Market Monetarist, in fact very few people are. So why on earth would this mean anything at all? I am of that particular persuasion because it isn’t Market Monetarism that makes the market reaction, it’s the market reaction that helps explain particular happenings from the Market Monetarist point of view. And I seem to recall that the Recovery and Reinvestment Act was passed in early 2009 and shortly thereafter, the DOW reached its low.
I don’t believe the markets expected another $10B to be shaved off the top without further obvious positive developments, having the totality of expectations priced in prior to the statement. And this statement, indeed, changed those expectations. It’s almost as if “they” know that the FOMC is more interested in getting out of the QE business than it is in the mandates or the official target, using any excuse necessary.
The statement says they know inflation persistently below target is risky. They say that longer term inflation remains stable (which isn’t what we should be looking for). They say they are looking for evidence that inflation will move toward the target as they expect it will – but they don’t justify that expectation as there isn’t much to justify it with. The gross yield on a 10-year government bond is 2.6%. So somewhere between now and 10 years out, we still will not on target inflation, with the headline unemployment rate at 6.7% now. That tells me that we are two-tenths of a percent away on headline unemployment before the itchy trigger fingers move toward the next frontier of rising short term nominal rates because the FOMC doesn’t care about the down side of its target – which is the only thing that should matter given the circumstances of inflation targeting. And for that matter, it doesn’t particularly care about meaningful employment gains either, tossing around the headline rate as if it is indicative of full employment.
And there isn’t anyone out playing damage control either. In fact, Charles Evans and Jeffrey Lacker are out on tour agreeing with each other that the FOMC members “face a pretty high bar” toward changing the pace of the taper. The taper is on, come hell or high water. Something tells me we’ll be seeing at least some high water before this over with.
Here’s the latest statement that was released by the Federal Reserve’s FOMC last week:
Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
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. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. 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 well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.