Taper 5: lower 2014 GDP forecast

The Fed tapers bond busy for the 5th time by $10 billion to $35 billion. The economic forecast is lower: 2.3% GDP, but also a lower unemployment projection. No change in inflation forecasts. They repeat the stance that rates will remain low for a considerable time. Expectations were for a fifth taper of bond buys to a monthly level of $35 billion. The focus is on the statement, the staff forecasts, released at the same time, and the press conference that begins at 18:30 and will be covered in a live blog.

Before the publication, EUR/USD traded higher at around 1.3570, GBP/USD was around 1.6750 and USD/JPY traded around 102.15. The dollar initially fell with EUR/USD jumping almost to 1.36, but it now falls towards 1.3550. Other currencies follow the same path

More news:

The decision was unanimous. New members were sworn in before the meeting.
They describe the jobless rate is lower, but still elevated.
GDP growth forecast is significant lower for 2014: 2.1-2.3% from 2.8-3%.
Fed’s finishing rate, long run interest rate, is lower than in previous assessments. It may be a guidance for the 30 year yield.
Inflation projections are only marginally higher: Core PCE is now 1.5-1.6% instead of 1.4-1.6% in March.
Unemployment is now 6-6.1% instead of 6.1-6.3% in March.
The cut to the GDP forecast for 2014 is in line with the recent downgrade of growth to deep contraction in Q1 2014 and in line with private sector forecasts.

Background

In April, the Fed tapered for the fourth time and did not provide any surprises. However, in March we had a big drama in the press conference: when Yellen was asked what is a “considerable time” between the end of QE and the first rate hike, she said “6 months”. As QE is expected to end in October, a rate rise comes in April 2015 according to this statement.

The dollar jumped as the markets had expected a hike only in Q3 2015, not Q1. Yellen and her colleagues later changed the tone, especially in the meeting minutes. So now, expectations are back to Q3.

This was analyzed as a slip on Yellen part – it was her first press conference. But was it really a mistake? Or just an initial hint? The recent surprisingly strong inflation numbers, which showed that Core CPI reached the Fed’s target of 2%, may lead the Fed to some hawkishness, perhaps even in line with that “6 months” comments.

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