May 17 2013 - The Fed Remains Dovish (No Surprise There)
The Fed Remains Dovish (No Surprise There)
The Federal Open Market Committee concluded its two-day meeting with a directive that was both bold and banal. In other words, it was a typical statement that need not be overanalyzed. The Fed has been dovish, is dovish, and will remain dovish for some time. That is ultimately a supportive stance for the equity market, assuming of course there isn't a loss of faith in the idea that the Fed is and will be an effective change agent driving the economy to its full growth potential.
That potential has obviously not been reached despite the Fed purchasing roughly $3 tln of agency debt, agency MBS, and Treasuries over the last four years. Today's statement, though, indicates the Fed remains bowed and determined to stay the course with accommodative policy in order to meet its dual mandate of maximum employment and price stability. There weren't a lot of overt changes in the directive, but one passage drawing added attention is the following:
"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."
The acknowledgment that purchases could be increased is what has the talking heads talking out of their mind. The fact of the matter is that such an option was held out in the minutes from the March meeting. Moreover, it was always implied in past directives noting the Committee will employ other policy tools as appropriate if the labor market did not improve substantially in the context of price stability.
In any event, the understanding that the word "increase" actually made it into the May directive will be interpreted to mean the Fed is perhaps not as close to tapering its purchases as soon as some had feared after reading the March FOMC Minutes. That stands to reason in our estimation with the PCE Price Index up just 1.0% year-over-year, the unemployment rate at 7.6% due in part to a drop in the labor force participation rate, and long-term inflation expectations very much in check.
Kansas City Fed President George once again dissented on concerns that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. Those are reasonable concerns, yet they have largely been set aside by the equity market's continued faith in the majority opinion that has been dovish, is dovish, and will remain dovish for some time.
Notable Changes from Last Statement
Economic Projections from last meeting
|Fed Economic Projections (central tendencies as of March 2013)|
|Change in real GDP||2.3 to 2.8||2.9 to 3.4||2.9 to 3.7||2.3 to 2.5|
|Dec projection||2.3 to 3.0||3.0 to 3.5||3.0 to 3.7||2.3 to 2.5|
|Unemployment rate||7.3 to 7.5||6.7 to 7.0||6.0 to 6.5||5.2 to 6.0|
|Dec projection||7.4 to 7.7||6.8 to 7.3||6.0 to 6.6||5.2 to 6.0|
|PCE inflation||1.3 to 1.7||1.5 to 2.0||1.7 to 2.0||2.0|
|Dec projection||1.3 to 2.0||1.5 to 2.0||11.7 to 2.0||2.0|
|Core PCE inflation||1.5 to 1.6||1.7 to 2.0||1.8 to 2.1|
|Dec projection||1.6 to 1.9||1.6 to 2.0||1.8 to 2.0|