FOMC Statement: March Vs February 2014 Text

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Redacted Version of the March 2014 FOMC Statement By David Markel CFA of alephblog

January 2014 March 2014 Comments
Information received since the FOMC met in December indicates that growth in economic activity picked up in recent quarters. Information received since the FOMC met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Weather is always a weak reason for a bad result.  You almost never see anyone claim good weather boosted results.
Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. No significant change.
Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. No significant change.
Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. No change.  Funny that they don’t call their tapering a “restraint.”
Inflation has been running below the FOMC’s longer-run objective, but longer-term inflation expectations have remained stable. Inflation has been running below the FOMC’s longer-run objective, but longer-term inflation expectations have remained stable. No change.  TIPS are showing slightly lower inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.56%, up 0.02% from January.
Consistent with its statutory mandate, the FOMC seeks to foster maximum employment and price stability. Consistent with its statutory mandate, the FOMC seeks to foster maximum employment and price stability. No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The FOMC expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the FOMC judges consistent with its dual mandate. The FOMC expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the FOMC judges consistent with its dual mandate. Unemploys the concept of the Unemployment rate as the sole measure of labor conditions.  Maybe aggregate wages would be better.
The FOMC sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The FOMC sees the risks to the outlook for the economy and the labor market as nearly balanced. No significant change.
The FOMC 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. The FOMC 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. No change.  CPI is at 1.1% now, yoy.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the FOMC  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. The FOMC currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. Drops the language on fiscal retrenchment.  Continued overestimate of economy and labor conditions.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the FOMC decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the FOMC 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. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the FOMC decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the FOMC will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. Reduces the purchase rate by $5 billion each on Treasuries and MBS.  No big deal.
The FOMC 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 FOMC 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. No change
The FOMC’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 FOMC’s dual mandate. The FOMC’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 FOMC’s dual mandate. No change.  But it has little impact on interest rates on the long end, which are rallying into a weakening global economy.
The FOMC 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. The FOMCwill 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. No change. Useless paragraph.
If incoming information broadly supports the FOMC’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the FOMC will likely reduce the pace of asset purchases in further measured steps at future meetings. If incoming information broadly supports the FOMC’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the FOMC will likely reduce the pace of asset purchases in further measured steps at future meetings. No change.  Says that purchases will likely continue to decline if the economy continues to improve.
However, asset purchases are not on a preset course, and the FOMC’s decisions about their pace will remain contingent on the FOMC’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. However, asset purchases are not on a preset course, and the FOMC’s decisions about their pace will remain contingent on the FOMC’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. No change.
To support continued progress toward maximum employment and price stability, the FOMC 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. To support continued progress toward maximum employment and price stability, the FOMC today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. No change.
The FOMC 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 FOMC’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. Drops the contentious sentence locking themselves into a policy.
In determining how long to maintain a highly accommodative stance of monetary policy, the FOMC will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the FOMC will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Monetary policy is like jazz; we make it up as we go.  Also note that progress can be expected progress – presumably that means looking at the change in forward expectations for inflation, etc.
The FOMC 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 FOMC’s 2 percent longer-run goal. The FOMC 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 for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the FOMC’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. Makes its standards for raising Fed funds more arbitrary.
When the FOMC 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. When the FOMC 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. No change.
The FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run. New sentence.  Says loose policy will stay longer than needed.
With the unemployment rate nearing 6-1/2 percent, the FOMC has updated its forward guidance. The change in the FOMC’s guidance does not indicate any change in the FOMC’s policy intentions as set forth in its recent statements. New sentence.  Says loose policy will stay longer than needed.  Also, disregard any change in policy that you might have seen here.  We still felt the need to change the statement, but really, nothing has changed.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo. Bernanke is gone.  Good.  Yellen is Chair. Bad.
Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the FOMC’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity. This is perhaps the lamest vote against an FOMC decision that I have ever seen.  The differences between the fifth and sixth paragraphs are minuscule.

 

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Comments

  • Small $10 B/month taper.  Equities, commodities, and long bonds both fall.  The FOMC says that any future change to policy is contingent on almost everything.
  • They have an optimistic view of the economy, especially on labor.  At least they are abandoning the unemployment rate as their measure of labor conditions.
  • They missed a real opportunity to simplify the statement.  More words obfuscate, they do not clarify.
  • Current proposed policy is an exercise in wishful thinking.  Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In the past I have said, “When [holding down longer-term rates on the highest-quality debt] doesn’t work, what will they do?  I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.  The Fed is playing with forces bigger than themselves, and it isn’t dawning on them yet.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.