Federal Open Market Committee Alters Language, Not Policy

As expected, no change in the Fed's bond-buying program was made when the Fed released the press statement following the two-day meeting of the Federal Open Market Committee. The Fed will continue to buy $40 billion of mortgage backed securities and $45 billion of Treasuries every month. As was the case with the March 20 meeting, the Fed viewed economic growth as moderate, and “continues to see downside risks to the economic outlook,” while inflation was expected to run “at or below its two percent objective.” In new language in this statement, the Fed added a sentence, “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.” That gives the Fed more flexibility to either engage in more quantitative easing, or begin tapering it, depending on the incoming data. Even so, the Fed made little mention of the weak payroll gains last month. Its observation of the labor market was that “labor market conditions have shown some improvement in recent months,

, but the unemployment rate remains elevated.” The only change to that statement May 1 from the March 20 statement was the addition of two words: “on balance.” The Fed also made an assessment in the May 1 statement that “economic activity has been expanding at a moderate pace.” This is a change from the March 20 statement, when the Fed noted “a return to moderate economic growth following a pause late last year.” Whether or not the markets were concerned about mixed signal in economic activity, such as the dip in retail sales, the Fed instead maintained the same language as in the prior statement that “household spending and business fixed income advanced.” Both statements also acknowledged that the “housing market has strengthened further.” However, the May 1 statement also noted the increased drag from fiscal policy. In Wednesday's statement, the Fed noted that “fiscal policy is restraining growth.” In the March 20 statement, the Fed commented that “fiscal policy has become somewhat more restrictive.” Other language was generally unchanged from the March 20 meeting. The Fed reiterated its plans to keep the Fed Funds rate near zero until at least unemployment falls below 6.5 percent while inflation remains under 2.5 percent and inflation expectations remain well-anchored. Note, however, that that threshold does not apply to how long the bond purchase program will last. That will depend on when “the outlook for the labor market has improved substantially in the context of price stability,” a less-concrete definition of an end date. As was the case at the March meeting, Esther George, President of the Kansas City Fed, dissented. She “was concerned 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.”