The FOMC: We Can’t Taper QE Yet, Economy Slower Than Expected in 2013


After several weeks of chatter and speculation, the long-awaited statement from the Federal Open Market Committee is here.

The arm of the U.S. Federal Reserve responsible for open market operations — i.e. quantitative easing — concluded its two-day meeting on Wednesday. Most people were not expecting a major change in the central bank’s monetary easing programs, and that’s exactly what the Federal Reserve delivered. The central bank sees improvement economic activity expanding at a “moderate pace,” while labor market conditions have shown “further improvement.”

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The FOMC statement explains, “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

Additionally, the central bank reiterated that it could increase or decrease bond purchases: “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. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”

CNNMoney recently polled 39 economists and investment strategists for their predictions about the Federal Reserve’s next major move. Almost two-thirds of the people do not think the central bank will slow its bond-buying before this December. The rest believe a change could come earlier at the September or October meeting. Another survey by USA Today finds that seven of 10 economists predict the Federal Reserve will begin scaling back this year, with the majority of that group saying the first move will occur by early fall.

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As the chart above shows, the FOMC also updated its projections for the economy. The central bank downgraded its view on gross domestic product for this year when compared to the March projection, but raised its forecast for next year. The unemployment rate is not expected to hit 6.5 percent until 2014, which is an improvement from the prior projection. The Fed’s outlook for inflation was downgraded across the board. However, investors should keep in mind that the Fed has been too bullish about economic growth in every year of the “recovery.”

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