The Fed Remains Dovish (No Surprise There)

The Federal Open Market Committee concluded its two-day meeting with a directive that was both bold and banal. In other words, it was a typical statement that need not be overanalyzed. The Fed has been dovish, is dovish, and will remain dovish for some time. That is ultimately a supportive stance for the equity market, assuming of course there isn't a loss of faith in the idea that the Fed is and will be an effective change agent driving the economy to its full growth potential.

That potential has obviously not been reached despite the Fed purchasing roughly $3 tln of agency debt, agency MBS, and Treasuries over the last four years. Today's statement, though, indicates the Fed remains bowed and determined to stay the course with accommodative policy in order to meet its dual mandate of maximum employment and price stability. There weren't a lot of overt changes in the directive, but one passage drawing added attention is the following:

"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 acknowledgment that purchases could be increased is what has the talking heads talking out of their mind. The fact of the matter is that such an option was held out in the minutes from the March meeting. Moreover, it was always implied in past directives noting the Committee will employ other policy tools as appropriate if the labor market did not improve substantially in the context of price stability.

In any event, the understanding that the word "increase" actually made it into the May directive will be interpreted to mean the Fed is perhaps not as close to tapering its purchases as soon as some had feared after reading the March FOMC Minutes. That stands to reason in our estimation with the PCE Price Index up just 1.0% year-over-year, the unemployment rate at 7.6% due in part to a drop in the labor force participation rate, and long-term inflation expectations very much in check.

Kansas City Fed President George once again dissented on concerns that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. Those are reasonable concerns, yet they have largely been set aside by the equity market's continued faith in the majority opinion that has been dovish, is dovish, and will remain dovish for some time.

Notable Changes from Last Statement

• Economy (Language slightly changed)
  • May 1: Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated.
  • March 20: Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year.  Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated.\
• Inflation: (No change)
  • May 1:  Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable
• Repurchase Plan: (No change)
  • May 1: To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 bln per month and longer-term Treasury securities at a pace of $45 bln per month.
• Rates (No change)
  • May 1: The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
• Committee Monitoring: (Line added)
  • May 1: The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. 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. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
  • March 20: The Committee will closely monitor incoming information on economic and financial developments in coming months.  The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
• Dissenter:
  • Kansas City Fed President Esther George dissented at this meeting (she also dissented in March).

Economic Projections from last meeting