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People line up for a job fair in New York City last week. Federal Reserve chairman Ben Bernanke is worried that the unemployment rate could be settling at current levels, which is problematic because more than five million fewer people are employed today than at the pre-recession peak. (Shannon Stapleton/Reuters)
People line up for a job fair in New York City last week. Federal Reserve chairman Ben Bernanke is worried that the unemployment rate could be settling at current levels, which is problematic because more than five million fewer people are employed today than at the pre-recession peak. (Shannon Stapleton/Reuters)

Economy Lab

Fed leaves investors in the dark Add to ...

Investors, you are on your own.

The Federal Reserve’s policy committee ended a two-day meeting Wednesday by issuing a statement that is almost identical to the one the Federal Open Market Committee posted after its previous session in March.

A separate release showed the Fed is only marginally more optimistic about the economic outlook than it was at the start of the year. The central bank’s forecast for economic growth this year, based on the projections of 17 policy makers, is between 2.4 per cent and 2.9 per cent, compared with 2.2 per cent and 2.7 per cent previously. The forecast for 2013 is 2.7 per to 3.1 per cent, essentially unchanged.

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Also, policy makers dropped a reference that strains on the global financial system were easing. This doesn’t necessarily means conditions have become worse; rather, with Spanish bond yields again approaching 6 per cent, the change likely reflects an acknowledgement that the European debt crisis stopped improving. Policy makers said the situation remains a "significant downside risk" to the outlook, as they did in March.

The incremental upgrade in the outlook explains the incremental upgrade in the policy committee's qualitative assessment of the economy. There was one small deviation in the statement worth noting. The committee said there have been “some signs of improvement” in the housing market. Despite that, policy makers continue to describe housing as “depressed,” constituting a major drag on the recovery.

A separate release showed the Fed is only marginally more optimistic about the economic outlook than it was at the start of the year. The central bank’s forecast for economic growth this year, based on the projections of 17 policy makers, is between 2.4 per cent and 2.9 per cent, compared with 2.2 per cent and 2.7 per cent previously. The forecast for 2013 is 2.7 per to 3.1 per cent, essentially unchanged.

“The committee expects economic growth to remain moderate over coming quarters and then to pick up gradually,” the FOMC statement said, repeating March’s language, which at the time was seen as a shift toward a brighter outlook at the Fed.

A lack of new guidance by the Fed will force investors to concentrate on incoming data to assess the course of monetary policy. The acknowledgment that housing indicators have improved over the past couple of months suggests that policy makers remain comfortable that the economy has forward momentum. That argues against further stimulus measures, including a third asset-purchase program. But the absence of any significant change in the Fed’s description of economic conditions also argues that current policy will remain locked in.

"The committee is quite comfortable with the consensus we have reported today," Fed Chairman Ben Bernanke said at a press conference.

"That represents a very accommodative stance," he added. "We remain willing and able to take a further action if necessary," a decision that will depend on the outlook for the economy evolves.

"If the outlook strengthened notably, we would have to adjust," Mr. Bernanke said, a comment meant to emphasize that the Fed’s commitment to keep rates low is conditional on the economic outlook.

The most important data will be those linked to the labour market. The U.S. unemployment rate has declined fairly steadily since November, 2010, when the jobless rate was 9.8 per cent, to 8.2 per cent in March.

But many of the Fed’s most influential officials, including chairman Ben Bernanke, say the rapid decline might be exaggerating the strength of the recovery. Mr. Bernanke has argued that the plunging unemployment rate could simply be payback for a similarly outsized surge at the outset of the financial crisis. He’s worried that the unemployment rate could be settling at current levels, which is problematic because more than five million fewer people are employed today than at the pre-crisis peak.

“Labour market conditions have improved in recent months; the unemployment rate has declined but remains elevated,” the statement said. That’s exactly how the FOMC described it in March. Policy makers reiterated that they intend to leave borrowing costs “exceptionally low” at least through the end of 2014.

Jeffrey Lacker, the head of the Richmond Fed, voted against the consensus, as he did at previous meetings. Mr. Lacker believes the economy is stronger than many think, and that the conditional pledge to leave interest rates low until 2014 is unwarranted.

Mr. Lacker’s worries about inflation are having little impact on his counterparts. Of the 10 officials who actually get a vote on policy, he is in a distinct minority. But even on the full committee of 17, there is little worry about a surge in prices. The Fed’s consensus outlook for inflation is about 2 per cent this year, right on its target. In 2013, the consensus is for inflation of 1.6 per cent to 2 per cent.

However, at the margin, the large FOMC is moving away from implementing more stimulus measures. In January, two members of the committee felt the Fed’s benchmark rate should be left at its current near-zero level until 2016.

Three months later, no one is advocating such an extraordinary commitment to ultra-low rates: Seven would raise the Fed funds rate in 2014, and four would do so in 2015.

But Mr. Bernanke cautioned against putting too much emphasis on the individual forecasts for interest rates, which the Fed published for only the second time Wednesday. Instead, Mr. Bernanke said the public should focus on the FOMC’s statement, which reflects the consensus of the 10 members who determine policy.

"These projections are inputs into a committee process," he said. "The committee had no difficulty coming to a conclusion that the (current) guidance is appropriate."

Follow on Twitter: @CarmichaelKevin

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