Unchanged policy and moderate growth
The Federal Open Market Committee (FOMC) decided at its interest rate meeting on April 25 to keep the target range for the federal funds rate at 0-0.25 percent and to continue its programme to extend the maturity of its holdings of securities. The statement also reiterated the conditional pledge of exceptionally low levels for the federal funds rate until late-2014. Since the last meeting in March, the economy has been expanding moderately, according to the statement. Labour market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. The FOMC expects economic growth to remain moderate over coming quarters and then pick up gradually; the unemployment rate will decline gradually. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily. Jeffrey M. Lacker of Richmond voted against the action, as he does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late-2014.
Fed officials’ individual projections
Fed officials revised up (from January) the GDP growth projection for 2012 to 2.4-2.9 percent and revised down the projections for 2013 and 2014 to 2.7-3.1 percent and 3.1-3.6 percent, respectively. The projections of the unemployment rate were revised down for all three years to 7.8-8, 7.3-7.7 and 6.7-7.4 percent, while core inflation was revised up for all three years to slightly below 2 percent. The projections showed seven out of seventeen officials now believe it would be appropriate to raise borrowing costs some time in 2014, up from five in January, while only four wanted to wait longer, down from six. Moreover, the median Fed official believed the fed funds rate should remain unchanged until the end of 2013 and then rise to 1 percent at the end of 2014, up from 0.75 percent in the January projections. According to the median-voter theorem, if the FOMC were to vote on monetary policy the view of the median Fed official would win that poll. However, not all Fed officials are voting members of the FOMC, but we still regard the median view as an important indication of the Fed's current expectations.
Listen to the median Fed official and not to Ben Bernanke
Our view is that the Fed will hold policy unchanged until the end of 2013. Fed Chairman Ben Bernanke seems to be significantly more doveish than the majority of the FOMC, but we consider his view to be a less important guideline for the future than the median view. At the press conference after the interest rate meeting, he tried to be a good spokesman for the FOMC majority. He said that despite the Fed’s dual goals and inflation being contained, while unemployment is elevated, the FOMC is not willing to ease policy, as it could erode the Fed’s credibility of being tough on inflation. That is significantly more doveish than his previous view of giving equal importance to the Fed's dual goals. But he was not able to resist the temptation of trying to affect market expectations through cheap talk and said that they remain prepared to do more if the economy requires additional support in an attempt to keep the QE3 window open.