The Fed's 3 New Sentences That Matter
The Federal Reserve announced the results of its latest all-important Open Markets Committee meeting on Wednesday afternoon, and they're exactly the same as last month's results—but with three important changes. The committee's official statement reads that "economic growth will proceed at a moderate pace and the unemployment rate will gradually decline," with a projection of about 6.5 percent unemployment by next year. Until that happens, they'll just keep doing what they're doing: Buy securities through the Quantitative Easing program (QE3), and keeping interest rates exactly where they are.
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Thing is, that's what they said last month, too, word-for-word. In fact, The Wall Street Journal helpfully offers a tool that compiles and compares every FOMC statement for that last seven years. A comparison of the text of today's statement with the previous one from May shows that other than changing the date and one minor word, only three sentences were edited in any way.
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On the surface, even those changes may not look like much, but for market watchers trying desperately to predict the future of monetary policy (and by extension, the best investments they need to make to take advantage of that future), those three sentences mean everything. So how should they be interpreted?
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Well, here's the first sentence that was substantially changed. Here's how it appears in today's release:
Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Here's what they said last month:
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.
Did you catch the differences? Inflation is below what they've been going for, but now it's because of "transitory influences." What are those influences? No one knows, really, but it's basically the Fed's way of saying, we're not concerned enough that things aren't going exactly the way we've hoped that's we're not changing course. (If it's only transitory, eventually that will change.) For those hoping that QE3 would end soon, they're out of luck for the time being.
Low inflation? "Transitory." High unemployment? Unfortunate. We'll be at the bar. Don't call us. We'll call you.
— Binyamin Appelbaum (@BCAppelbaum) June 19, 2013
The second changes was about "downside risk. Here's March:
The Committee continues to see the downside risks to the ecnomic outlook.
And today:
The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. (Emphasis added.)
That's a fancy way of saying things are not bad as they seemed last fall. That doesn't mean anything is fixed yet, but as with the opening statement the message remains, "Slowly, but surely, things will get better."
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The only other change from last month is that one single member of the board, James Bullard, changed his vote on the Fed's policy decision (which was ultimately to keep doing what they've doing. Bullard thinks the Fed "should signal more strongly its willingness to defend its inflation goal," but he's still wildly out numbered (only one other member voted with him) so for now, his concern will be ignored. At least until the next meeting, when the guessing begins again.
