According to the FOMC’s statement yesterday, the economy “expanded at a modest pace during the first half of the year.” The pace had been characterized as “moderate” in the previous seven statements since the one dated September 13, 2012. The downgrade is understandable given that yesterday morning the Bureau of Economic Analysis (BEA) once again revised Q1’s real GDP downward to only 1.1% (saar). That contributed to a better-than-expected gain of 1.7% during Q2.
The FOMC statement also tweaked the message about inflation to reflect the latest numbers: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.” The previous seven statements simply noted: “The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.” (A searchable archive of these FOMC statements is available at The Fed Center.)
Yesterday’s GDP report showed that the core personal consumption deflator rose at an annual rate of just 0.8% during Q2, down from 1.4% during Q1. On a y/y basis, it is up 1.2%.
All in all, the FOMC didn’t change the message much at all from the previous one dated June 19. Despite widespread expectations that QE will be tapered at the next FOMC meeting in September, the latest statement simply indicated that the Fed will continue to buy $85 billion in Treasuries and Agencies but will either increase or decrease this pace “as the outlook for the labor market or inflation changes.”
There was no change in the forward guidance on how long the federal funds rate will remain near zero. The unemployment threshold for starting to discuss the possibility of tightening monetary policy remains at 6.5%. There was no hint that a lower jobless rate, such as 5.5%, was even discussed. Nor was there any hint that the FOMC is considering a threshold for the inflation rate.
On balance, the statement was more dovish than the previous one. That simply reflects the fact that monetary policy is data dependent. The data that were released yesterday showed weak GDP growth and near-zero inflation. Indeed, nominal GDP was up only 2.9% y/y during Q2, the lowest since Q1-2010.
I suppose that all this lowers the odds of QE tapering starting at the September meeting. However, I hope that there was some discussion at the latest meeting about why the economy is so weak given so much QE. Since the latest program was started on September 13, 2012, the Fed’s balance sheet has increased by $751 billion to a record $3.5 trillion.
The FOMC statement also tweaked the message about inflation to reflect the latest numbers: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.” The previous seven statements simply noted: “The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.” (A searchable archive of these FOMC statements is available at The Fed Center.)
Yesterday’s GDP report showed that the core personal consumption deflator rose at an annual rate of just 0.8% during Q2, down from 1.4% during Q1. On a y/y basis, it is up 1.2%.
All in all, the FOMC didn’t change the message much at all from the previous one dated June 19. Despite widespread expectations that QE will be tapered at the next FOMC meeting in September, the latest statement simply indicated that the Fed will continue to buy $85 billion in Treasuries and Agencies but will either increase or decrease this pace “as the outlook for the labor market or inflation changes.”
There was no change in the forward guidance on how long the federal funds rate will remain near zero. The unemployment threshold for starting to discuss the possibility of tightening monetary policy remains at 6.5%. There was no hint that a lower jobless rate, such as 5.5%, was even discussed. Nor was there any hint that the FOMC is considering a threshold for the inflation rate.
On balance, the statement was more dovish than the previous one. That simply reflects the fact that monetary policy is data dependent. The data that were released yesterday showed weak GDP growth and near-zero inflation. Indeed, nominal GDP was up only 2.9% y/y during Q2, the lowest since Q1-2010.
I suppose that all this lowers the odds of QE tapering starting at the September meeting. However, I hope that there was some discussion at the latest meeting about why the economy is so weak given so much QE. Since the latest program was started on September 13, 2012, the Fed’s balance sheet has increased by $751 billion to a record $3.5 trillion.
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