On the whole, Goldman viewed today's FOMC meeting as moderately more hawkish than expected. The post-meeting statement was close to their expectations but a few changes added a more upbeat tone. Fed officials revised up their forecast for core inflation and down their forecasts for unemployment, in both cases by larger amounts than many had expected. Likely as a result, some participants also lifted their forecasts for the federal funds rate. Chairman Bernanke’s press conference was more balanced—additional easing did not appear to be in his baseline, but he also did not take it off the table.
Goldman Sachs: FOMC Meeting: Summing Up
- Results from today’s FOMC meeting—the statement, revised forecasts, and Chairman Bernanke’s press conference—were on the whole slightly more hawkish than we had expected. As the chairman noted in his remarks, Fed officials appear to see the stance of policy “as being approximately in the right place at this point”. We continue to expect easing at the June FOMC meeting, but as we have emphasized, this will require a further deterioration in the incoming data, particularly in news on the labor market.
- Most of the post-meeting statement was in line with our expectations. However, the committee noted “some signs of improvement” in the housing market, and said that it expects growth to “pick up gradually”. Both phrases reflect known information, but the additions give the statement a slightly more upbeat tone than we had anticipated.
- Revisions to the Summary of Economic Projections (SEP) showed a lower path for the unemployment rate and a higher path for core inflation than we expected. The central tendency forecast for the unemployment rate for Q4 2012 was 7.8-8.0%, down from 8.2-8.5% at the January meeting and below our expectation of 7.9-8.2%. Fed officials also trimmed their unemployment rate forecasts for 2013 and 2014 by 0.25 percentage points (pp) and 0.10pp, respectively (using the midpoints of the central tendency). The central tendency forecast for core inflation increased by 0.25pp for 2012, and 0.1pp for 2013 and 2014 (again using the midpoints).
- Likely as a result of the lower unemployment rate trajectory and higher core inflation forecast, several officials also revised up their projections for the federal funds rate. In particular, none of 17 participants now forecasts that the first rate hike will occur in 2016 (from 2 in January), and seven now expect the first hike in 2014 (up from 5 in January). The mean and median of the year-end funds rate forecasts for the next three years changed only slightly: both increased by 0.20-0.25pp for 2014 and were nearly unchanged for the prior two years.
- The updated funds rate forecasts now contrast even more starkly with the “exceptionally low …at least through late 2014” guidance in the statement: only 4 members now forecast a 0.25% funds rate for the end of 2014, and only 7 forecast a funds rate of less than 1% at that time. This implies that at least two members voted in favor of the statement despite forecasting an end-2014 funds rate of 1% or higher. Bernanke tried to reconcile this by noting that the forecasts were only “an input” to the committee’s decision process, and suggesting that the committee decision also reflected the balance of risks to the forecast. (However, see also point on definition of “exceptionally low” below.)
- Chairman Bernanke’s press conference was more neutral for the outlook than the statement and the updated SEP, in our view. On one hand, he defended a question about the Fed’s current policy stance by arguing that the committee was not willing to tolerate materially higher inflation—implying this would be a risk associated with further easing. He also seemed to say that that the “exceptionally low” description for the funds rate could imply something higher than 0-0.25%, at least to some members. The exact quote (from the Fed’s online transcript) was: “One of the reasons that the language, in the statement is sometimes a little vaguer than you'd like is because we're trying to get a consensus among 17 or at least 10 people. And different members or participants in the FOMC might have different views of what exceptionally low means. I think it’s something close to where we are now.”
- On the other hand, his comments on the policy options were tilted toward further easing. He mentioned the possibility of easing on a number of occasions, and said that the Fed would continue to monitor “whether unemployment is making sufficient progress towards our objectives”. In contrast, Chairman Bernanke said that bringing in the forward guidance would be warranted if the data were “much stronger than expected” (our emphasis).
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