In its latest Federal Open Market Committee (FOMC) meeting, the
Federal Reserve resolved to stay the course with its current
policies, despite some disturbing signs in recent economic
data.
As a result of its two-day meeting on April 24 and 25, the FOMC
showed no change in its conviction that short-term interest rates
would remain near zero until 2014, nor did they reveal any new
policy initiative to take over when
Operation Twist
expires in June. While recent economic data may have given FOMC
members some pause, it was not deemed significant enough to warrant
any policy changes.
The gathering storm
The meeting took place amid some disturbing developments in
economic trends lately. A couple of months ago, growth seemed to be
gaining momentum and inflation seemed benign. Since then
though:
- The employment report for March showed much slower job
growth.
- March durable goods orders showed a 4.2 percent decline from
the previous month.
- Inflation perked up in February and March.
Despite this, the
FOMC press release
on the results of its April meeting expressed optimism that the
unemployment rate would continue to come down, and dismissed the
rising inflation rate as a temporary result of rising oil and
gasoline prices.
While the Fed's constancy can be maddening to people on both
side of the policy fence -- i.e., depositors who would like to see
higher
savings account rates
and stock investors who would like to see more stimulus -- the
absence of a change in direction can be justified on two
grounds:
- Disturbing as some of the March economic data has been, it is
just one month, and that does not constitute a trend. It would be
unsettling to the economy and the financial markets if the Fed
shifted direction with every twist and turn in monthly data.
- From a policy standpoint, recent signs of trouble have been
contradictory. Weakening employment and durable goods orders
would argue for more stimulus, while rising inflation would argue
for higher interest rates. In that sense, they cancel each other
out, or at least do not suggest any clear policy solution.
A sunnier outlook in the near term
Along with its press release explaining its policy decisions,
the Fed also released
an update to the detailed economic projections
it recently began making.
Since the last set of projections, issued in late January, the
Fed has become more optimistic about economic growth -- up to a
point. The FOMC's range of expectations for real GDP growth this
year is now between 2.4 percent and 2.9 percent, up from
projections of 2.2 percent to 2.7 percent in January. Interestingly
though, the ranges of GDP projections for 2013 and 2014 are now
actually lower than they were in January.
The FOMC's projections for unemployment and inflation show a
more consistent pattern, with projections for unemployment down
slightly, and projections for inflation up slightly, across all
three years.