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There are No Bubbles, QE Is Working!

The Daily Ticker
Daily Ticker

The Federal Reserve concluded a two-day meeting with no change in policy but a tweak to its economic forecast.

The Fed lowered its unemployment rate forecast slightly for 2013 through 2015—suggesting a bit more strength in the job market—but also skimmed 0.1% to 0.2% off its GDP forecast for the same periods, which suggests slightly slower growth.

As it stands now, the Fed’s so-called “central tendency” for unemployment is 7.3%-7.5% for this year, 6.7%-7% for 2014 and 6%-6.5% for 2015. The unemployment rate is key for future Fed policy since the central bank has said it would maintain its current easy monetary policy until the jobless rate falls below 6.5%

The Fed’s latest GDP forecast is 2.3%-2.8% this year, 2.9%-3.4% next year and 2.9%-3.7% in 2015. The slightly lower GDP forecast could reflect the impact of billions of dollars in federal spending cuts that just started to take effect as part of the sequester that Congress and the White House let stand despite expectations and desires to reform it.

In his press conference following the release of the Fed's latest policy statement, Fed Chairman Ben Bernanke said the "federal fiscal restraint" resulting from the sequester cuts and reversal of the employee payroll tax cut "is an issue for us," referring to the 1.5% reduction in growth that the CBO forecasted. "The economy is weaker [and] job creation is slower than it would be otherwise…but monetary policy cannot offset a fiscal restraint of that magnitude," said Bernanke.

Also possibly weighing on Fed policymakers is the latest crisis in the Eurozone, namely the failure by Cyprus failed to approve a plan that would let it access a much needed bailout to avoid bankruptcy and leaving the Eurozone. In his press conference Bernanke said the Fed is monitoring the situation in Cyprus but doesn’t see much risk to the U.S.

In his press conference Bernanke also said the Fed is monitoring the situation in Cyprus but doesn’t see much risk to the U.S.

Allen Sinai, president and chief economist at Decision Economics tells The Daily Ticker,” The Fed’s statement is virtually identical to the last one. The only change was they lowered their unemployment rate expectations but not enough to change policy.”

Sinai expects the Fed will continue its current policy of near zero short-term rates through this year and much of next year. Once the unemployment rate nears 7%--which could happen in 2014, according to the Fed’s latest forecast--the central bank will likely raise the Fed funds rate to a range of 0.25% to 0.50%, says Sinai. Later on, he says, the Fed could start to gradually end its asset purchases, starting first with mortgage-backed securities (It now buys $40B monthly) followed by Treasuries (it now buys $45B monthly).

Sinai supports the Fed’s easy money policy.

“No one can tell me that what the Fed is doing isn’t helping the economy,” he says, adding that the policy has also helped boost the prices of stocks and other assets, which in turn help accelerate consumer spending. But he admits that the Fed’s swelling of its balance sheets to stimulate the economy “is totally new…[and] rewriting history.”

Sinai isn’t worried about the Fed’s easy monetary policy now or when it starts to phase it out. “Before the Fed begins to exit the markets will react… because the economy will be better… the unemployment lower…[and] the equity bull market will go on.”