The FOMC 2-day meeting ended Wednesday and its afternoon statement didn’t contain many surprises. QE3 is over, but ZIRP remains. Some headlines follow…
*FED ENDS THIRD ROUND OF QUANTITATIVE EASING AS PLANNED
*FED SEES ‘SOLID JOB GAINS’ WITH LOWER UNEMPLOYMENT
*FED REPEATS RATES TO STAY LOW FOR ‘CONSIDERABLE TIME’
And a small portion of the statement follows…
The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Clearly, the most important comments were from Janet Yellen & Co.; however, how it is interpreted is a very close second. Some important statements about the Fed’s policy are below.
From Goldman Sachs…
Looks a bit more hawkish to us… Do note inflation expectations have come down. Forward guidance… considerable time following end of purchase program this month. Plosser and Fischer voted in favor aka must be sufficiently happy with something else in the statement? Kocherlakota only dissent.
1) QE gone.
2) The hawks were on board, and a dove took the time to dissent – in our Fed “U” shape pattern, we think the shift to hawkish overall Fed has commenced and the pure hawks are appeased and winning and the pure doves, losing.
3) Job highlighted and as Yellen said back at Jackson Hole – structural unemployment is higher than she thought, so less slack, and as San Fran Fed said recently, when a period occurs where wages were sticky, once they finally start to rise, it happens very quickly
Fed comes in with a bit of a Hawkish tilt as it rids of key policy line around labor market and keeps “considerable time.” The buying program has ended. Hawks Fisher and Plosser voted for the action, while Kocherlakota voted against it, which is a flip from recent votes.
And finally, here is a key portion of the FOMC statement that basically says: “We can and will do whatever we want, including not raising interest rates when we said we would, if Fraud Street wishes.”
“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
So the NEW bond buying of QE3 has ended, but reinvestment’s of the $$trillions of bonds on the balance sheet will continue in MBS. Additionally, ZIRP will continue with no end in sight and that’s what Wall Street really wants.