There was little new from the FOMC statement, but key passage of from Ben Bernanke is the acknowledgement that “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.” This softens the downside risks the Fed warned about at the last meeting and reflects modestly improved confidence in the economic outlook.
Similarly, the labor assessment was subtly improved. It should be noted that QE3 began last October, so when combined with the moderation in downside risks the statement clearly hints that a tapering could be forthcoming over the next several months. Moreover, the Fed is not troubled by recent low inflation readings, as they partially reflect “transitory influences”.
Ben Bernanke on GDP growth
With respect to the updated Fed forecasts, the central tendency for 2013 real GDP growth was reduced to 2.3-2.6% from 2.3-2.8% previously; but 2014 real GDP growth was lifted to 3.0-3.5% from 2.9-3.4%. More importantly, the Fed reduced its unemployment rate central tendency to 7.2-7.3% from 7.3-7.5% previously—importantly, the key 6.5% unemployment rate threshold has now moved into the lower boundary of the 2014 forecasts, compared to 2015 previously. They also lowered their projections for core inflation to 1.2-1.3% from 1.5-1.6% for year end 2013.
Ben Bernanke on the Taper
In his initial comments at the beginning of the post-meeting press conference, Chairman Ben Bernanke suggested that if the economy evolved along the profile highlighted in the Fed’s central tendency forecasts, a moderation of the pace of purchases would be warranted later this year. Additionally, he suggested that the “taper” could end by mid-year 2014. He also stated that if the economy performs more strongly, the pace of the taper could become more aggressive.
Analysts React to Ben Bernanke
Brian Gardner, analyst at KBW states: The Fed made no changes in policy and slightly tweaked the language in its policy statement. The biggest news is that St. Louis Fed President Bullard gave a dovish dissent while the projections for the Fed funds rate were more dovish than in the previous forecast in March.
Joseph LaVorgna, Chief US Economist, Deutsche Bank states: we continue to anticipate the onset of the QE taper at the September FOMC meeting and believe it will be wound-down by year end or very early in 2014.