June 19, 2013 FOMC decision
Economics in a nutshell: If the incoming data are broadly consistent with (the members') forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.
June 19, 2013 FOMC decision
In a Nutshell: "If the incoming data are broadly consistent with (the members') forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year."
Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%
Quantitative Easing Decision: Bond purchases remain at $85 billion
To taper or not to taper, that was the question and at least for now the decision was not now but maybe at the end of the year. The FOMC statement after the two-day meeting largely parallels what was written but with some changes. One difference was instead of saying that the labor market conditions "have shown some improvement in recent months" the statement now reads "have shown further improvement". Sounds small but since there is a numerical target for the unemployment rate, further improvement is an indication that things are getting better.
Getting better is probably the operative phrase going forward. In his opening statement to his press conference, Fed Chairman Bernanke stated that if the members' forecasts were correct, economic conditions would improve to the point that by the end of this year, the Fed could start "tapering" their purchases of securities. As long as inflation and inflation expectations remained at acceptable levels, that process could end by the middle of next year. The timing of the beginning and ending of the tapering process was the expectation of the members though it was contingent on the forecast being correct. That, of course, is a major caveat but it did send a clear message that the Fed expects to start tapering by the end of this year or the beginning of next and the process would take about six months.
As for actual increases in the funds rate, Mr. Bernanke made it clear that they would not necessarily follow right after the ending of the asset purchases. A 6.5% unemployment rate is still the level that needs to be reached but it is the pathway to 6.5% that matters. He noted that 6.5% was "a threshold not a trigger". The faster that rate is hit, the sooner rates will rise. That is, a strong economy will mean rate hikes, a modestly growing one may mean that rates remain low even if the unemployment rate drops below 6.5%. Regardless, he made it clear that at least initially, rate hikes would be gradual.
Okay, what are the takeaways from this? First, while tapering is not starting and is still dependent upon the economy, it is likely that in the next six to nine months it will begin. That points to continued slowly rising interest rates. As long as the economy does not falter, that is the one thing that investors, bond fund owners, homebuyers, households and businesses who are thinking of borrowing money must keep in mind. As for the equity markets, earnings become even more critical as the support from the Fed now has a rough end point. Though everyone knew that was coming, they just didn't know when. Now they have a better idea.