US: The last dance

OK, we got it wrong. The Fed decided to taper by USD 10 bn its monthly security purchases, and Chairman Bernanke more or less announced that the Fed will keep on winding down at that pace at each meeting. Boston Fed ’ s President voiced his disagreement. We are sympathetic with his view that this decision comes to soon.

• Highly surprisingly, the Fed decide d to alter its monetary policy . The Fed Fund Target remains in the 0 - 0.25% range it has been since end - 2008 . But t he pace at which the Fed purchases securities as part of QE3 was winded down : USD 40 bn versus USD 45 bn of long - date d Treasury securities and USD 35 bn versus USD 40 bn of MBS each month.
  
• However , t he statement released before Chairman Bernanke started his press brief did not provide arguments for that move, with a wording hardly changed from one meeting to the other. And to be honest we did not get more details during the press brief.
• One important piece of information provided by Chairman Bernanke is the likely path of the tapering. Because it was pretty clear now that Chairman Bernanke is indeed expecting the Fed to taper: he repeatedly said that the program was not on a pre - set course and was data - dependent, but also stated that the pace of monthly pur chases could be reduced by the same amount (USD 10 bn) at each meeting. Were economic conditions disappointing , they would skip one meeting. Were they booming , they would slow harder;
• The additional change in the statement is that is it now written black on white that the Fed will wait maintain rates at their cur rent low levels “ well past the time that the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee ’ s 2% longer - run goal ” .
• FOMC memb ers did not dramatically change their forecasts. For this year, the median is slight ly down as for GD P growth and the unemployment rate, and slightly down for PCE inflation . Beyond that date, modifications are hard to spot. In short, the consensus among Fed officials is for GDP growth to accelerate progress ively, from 2.3 % in 2013 to 3.0% in 2014 and 3.2 % in 2015, which will d rive the unemployment rate close to its equilibrium level b y the end of 201 5 .
  
• As economic forecasts are broadly unchanged, the expected timing of policy firming ( the Fed ’ s wording for a rate hike) has been slightly postponed from September, with 2 members going for 2014 and 3 for 2016, and the rest of them ( 12 ) for 2015
• Today ’ s decision is a big surprise for us, and we are very sympathetic with E ri c S. Rosengren from the Boston Fed who dissented because he “ believes that, with the unemployment rate still elevated and the inflation rate well below the target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate ” . Admittedly , Fed members become less optimistic about the potential rate of GDP growth. A year ago, they were estimating it between 2.2% and 3%. Today, that range is 1.8% - 2.5%. We a lowere d potential growth in mind, you do not conduct the same policy