Today’s statement from the Federal Reserve was almost a carbon copy of the last one in September. No changes to the pace of quantitative easing or interest rates, which is exactly as the consensus expected. The Fed made only minor changes to the text of the statement, making it slightly more hawkish in one spot and slightly more dovish in another.
However, given the context of the statement, coming on the heels of a multiple-week partial government shutdown and intense budget wrangling, a status quo statement is, in effect, surprisingly hawkish. In other words, we expected the Fed to use the shutdown as an excuse for slower growth and extended QE.
The slight hawkish tilt in the statement itself was changing the position of the word “some” in a sentence on labor market conditions. By altering the position of that word, the Fed suggested job conditions are improving. The change might have been a reaction to the recent increase in the share of unemployed who voluntarily left (“quit”) their prior job, an indicator long followed by still-Vice Chair Janet Yellen. The Fed also removed language on a tightening of financial conditions, probably because the stock market is soaring.
The slightly more dovish tilt to the statement itself was adding language on a recent slowdown in the housing sector. (Given the huge improvement in the past year, we think recent figures are statistical noise, not signs of a problem.)
The next Fed meeting is in December, the last of the year. Despite John Hilsenrath’s WSJ article today, with federal budget fights looming in January and February, we doubt the Fed will change its views on tapering. Instead, we think the Fed will announce tapering in March and then fully wind down quantitative easing by late 2014.
The one dissent at today’s meeting was by Kansas City Fed Bank President Esther George, who continued to say policy is overly accommodative.
As we have written many times before, QE3 is not boosting growth, but, instead, is simply adding to the already enormous excess reserves in the banking system. There is little evidence that QE has lifted growth and price-to-earnings ratios remain below their levels in early 2008, before QE ever started.
QE is not dealing with the underlying causes of economic weakness. The economy has grown slowly, not because of deleveraging, or a recovery from financial problems, but because government is too big. Spending, regulation, and tax rates have all become a bigger burden on the economy – a wet blanket on recovery that the Fed cannot possibly offset. Continuing with a loose monetary policy until inflation becomes a problem will not achieve the maximum sustainable economic growth that is supposed to be one of the Fed’s goals.
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