Hilsencliff Notes: Q1 Worse Than Expected But Taper Stays
In one of his most voracious tomes, The Wall Street Journal's Fed-see-er Jon Hilsenrath prepared 726 words and published them in 5 minutes to explain that the Fed's forecasts for Q1 were dismally wrong, that the future will all be rosy, and their forecasts spot on, and that the Taper is steady..."Fed officials acknowledged the first-quarter slowdown was worse than expected by saying activity "slowed sharply." Previously, they had just said activity merely slowed...Still, officials nodded to signs of a pickup in economic activity in March and April, suggesting they aren't too worried about the winter slowdown."
The Federal Reserve said it would reduce its bond-buying program to $45 billion a month, while pointing to a growth pickup after a bad winter and sticking to previous guidance it has given on the outlook for short-term interest rates.
The steps were widely expected by investors before the meeting and represent a continuation of the monetary-policy strategy laid out by Fed Chairwoman Janet Yellen and former Chairman Ben Bernanke in the past few months.
The Fed's move came after a report earlier Wednesday that showed the U.S. economy barely grew in the first quarter. Fed officials acknowledged the first-quarter slowdown was worse than expected by saying activity "slowed sharply." Previously, they had just said activity merely slowed.
Still, officials nodded to signs of a pickup in economic activity in March and April, suggesting they aren't too worried about the winter slowdown.
"[G]rowth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions," the statement said.
The Fed said that household spending "appears to be rising more quickly." Recent reports on retail sales and auto sales have been stronger than expected.
But officials saw business fixed investment as having "edged down." Officials repeated their view from March that the "recovery in the housing sector remained slow."
With the move on its bond-buying program, the Fed will shave another $10 billion from its monthly purchases beginning in May. It was the fourth $10 billion reduction to the program since the beginning of the year. The cut will shrink the program to $25 billion in monthly Treasury bonds purchases and $20 billion in monthly mortgage-backed securities purchases.
Officials reiterated that they expect to keep scaling back the program in steady steps, provided the economy continues to evolve as they expect. The program is aimed at holding down long-term borrowing costs in hopes of boosting spending, hiring and growth.
All nine voting members of the policy-making committee supported the changes announced in the statement. Normally, the committee has 12 voting members, but the Fed board of governors currently has three vacancies.
It was the second time this year the Fed has voted unanimously for a policy move. That represents an unusually high degree of consensus for central-bank policy makers who have often been divided in the years since the financial crisis. Ms. Yellen has focused on maintaining consensus since taking over in February.
Presidents of regional Fed banks vote on a rotating basis. This year,Cleveland Fed President Sandra Pianalto, Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota are voters. Mr. Kocherlakota dissented at the last meeting, but supported the current move. The New York Fed has a permanent vote.
Little else changed in the three-page policy statement released by the Fed's policy-making committee. Officials held steady on the latest configuration of their interest-rate guidance, which they revamped at the Fed's March meeting.
Policy makers said they expect to keep short-term interest rates near zero "for a considerable time" after they stop buying bonds. Short-term rates have been effectively zero since December 2008.
Ms. Yellen suggested in a press conference in March that considerable time could mean six months, but there was no mention of such a time frame in the statement and Ms. Yellen strongly suggested in the same press conference that she didn't feel bound to that length of time.
In judging when to start raising rates, Fed officials will weigh a "wide range" of economic indicators, including labor market, inflation and financial sector measures, the Fed said in its statement.
Before the March changes, Fed officials had said they would keep interest rates frozen at least until the jobless rate falls to 6.5%, provided inflation remained in check. As the unemployment rate closed in on that level, officials felt the need to drop the numerical reference in favor of the less specific, broader guidance. Joblessness was 6.7% in March.
The Commerce Department reported earlier Wednesday that the economy hit a near-stall speed in the first quarter, growing at a rate of just 0.1%. Fed officials are predicting a pickup and saw signs of improvement in March and April.
A report by the Labor Department on Friday on the performance of the job market in April will provide the next big clue on whether their expectations will hold up.
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