Goldman Sachs saw no major surprises in the May FOMC statement, which, as we noted in the redline, was very little changed from the March statement. The most notable change, however, introduced additional flexibility around purchases, noting that "the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes." The slightly more aggressive nod towards fiscal policy "restraining" growth as opposed to "becoming restrictive" is perhaps yet another plea for some help from Washington - for, as we noted earlier [6], "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."
Via Goldman Sachs,
MAIN POINTS:
1. The May FOMC statement was very little changed from the March statement. Most notably, the statement included one wholly new sentence: "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes." We see this as introducing flexibility for the Committee, consistent with past statements from the Chairman and other Fed officials, rather than necessarily suggesting a near-term policy bias in one direction or the other. However, it may be notable that this sentence specifically refers to the pace of purchases, rather than the expected period of time over which purchases will continue, or the expected holding period of purchases.
2. There were also modest changes to the economic summary paragraph. According to the May statement, labor market conditions have shown signs of improvement only "on balance," probably a reference to the weaker March payrolls report since the last meeting. Fiscal policy "is restraining growth" rather than "has become somewhat more restrictive," a more direct characterization of the drag. There was no change to the inflation language, despite inflation readings softening over the intermeeting period. However, the new sentence about varying the pace of purchases implicitly recognizes the risk of inflation falling too low, raising the possibility that purchases could be increased if the current trend continues.