FOMC Meeting: The committee voted 11-1, holding policy at 0-0.25% and continuing QE programs. Ester George dissented, as expected. While continuing the $85bn ($40bn LT treasuries & $45bn MBS purchases) Bernanke warned these purchases would adjust as economic activity improved. Such orchestration will nevertheless begin once the job market shows fundamental improvements. “I think an important criterion would be not just the improvement that we’ve seen, but is it going to be sustained for a number of months?” Bernanke wondered aloud. While unimpressed with the extent of employment recovery so far, he also holds little excitement for stock’s recent rally, pointing out that inflation weighted indexes are nowhere near record highs.
FOMC members agreed that moderate economic growth would resume after the 4th quarter slowdown, as consumers and businesses increase spending, housing grows and employment expands. Amidst this growth longer-term inflation expectations remain anchored under 2% for the next 3 years, enabling the Fed’s expansionary policy to remain focused on its employment target. Bernanke noted that fiscal policy has become more restrictive to growth in 2013, estimating a total fiscal impact of -1.5% to this year’s growth. Consequently their 2013 GDP estimate dropped to 2.6% from 2.7% despite becoming more bullish on employment, forecasting a 2013 unemployment rate of 7.4%, down from 7.6%. The text “easing financial conditions” was removed from the statement, perhaps indicating FOMC members see little US fallout from the Cyprus credit-crisis.
Bernanke addresses Ester George’s worries that the QE program proposes “risks to financial stability, if persistently low rates lead some market participants to take on excessive risk in a reach for yield.” Nevertheless he did not mention if such bubbles were forming (see Higher Yield).
Bernanke’s term as chairman expires in January 2014 and expectations foresee no third term for the recession weary combatant. History suggests Bernanke will not change policy before his successor takes over, suggesting no QE adjustments until 2014. He admits, “I don’t think I am the only person in the world who can manage the exit.”
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