As expected, the FOMC ended its purchases of additional securities at the end of October. There are five noteworthy points in the statement this time. First, the FOMC painted the picture of a moderately growing economy, with an improving labor market, but still a picture that in no way yet resembles the kind of growth normally experienced coming out of a recessionary period. This puts the US economy in a moderately positive light, but when compared to the rest of the world, the spotlight is clearly intense.
Second, the FOMC will continue to roll over maturing security holdings with MBS purchases concentrated in the newly issued market.
Third, while the Committee noted that the labor market continues to improve, the reference point used was the beginning of QE and not a more recent point in time. It is obvious that the labor market has improved since 2010 when the unemployment rate was over 9 percent in 2009.
Fourth, there is a bit of a split with regard to the inflation outlook. Remember that one of the keys to the FOMC’s approach to inflation is not only that current inflation is contained but also that inflation expectations are well-anchored. The Committee noted that current inflation is low and likely to remain somewhat below the FOMC’s target, but the reason for this is that market-based measures of inflation have moved down slightly while survey-based measures remain relatively stable. Does this mean that the FOMC is concerned that inflation expectations may be on the verge of becoming unanchored, and perhaps in a direction towards deflation? The dissent by President Kocherlakota is keyed to this point concerning inflation expectations. His dissent places him toward the dovish side of the Committee’s views on the timing of the next rate hike, as reflected in the September SEP dot chart.
Finally, the statement goes to great length to suggest and emphasize once more that rates will likely be kept low for a “considerable time”; and, by inference, timing would be data-dependent. The lack of any modification of the language implies that there is still considerable work ongoing concerning the FOMC’s communications policy and approach to rate normalization.
