The Federal Reserve is leaving the door open to curbing its massive bond-buying program this year, as officials appear unfazed by the government shutdown and softer hiring data.
Policy makers opted Wednesday to carry on creating $85-billion (U.S.) a month to purchase Treasury debt and mortgage-backed securities, surprising no one.
But what did catch some Wall Street analysts off guard was the Federal Open Market Committee’s decision to issue a statement that made no direct mention of the 16-day government shutdown that obsessed international investors this month. Policy makers said only that fiscal policy was “restraining” growth, a statement of fact that the Fed has included in its policy statement for months.
Also missing from the statement was any obvious reaction to disappointing hiring data published since the Fed’s policy committee last met six weeks ago.
Officials reiterated that the unemployment rate – at 7.2 per cent – remains “elevated,” although hiring indicators generally “have shown some further improvement.” The Fed observed that household spending and business investment continued to advance, while the housing market weakened.
Wall Street analysts were expecting more panic.
Some estimates put the cost of the shutdown as high as $24-billion (U.S.) in lost economic output and the Labor Department’s most recent employment survey suggests hiring decelerated over the summer. The U.S. dollar rose after the Fed statement was released, and bond prices fell, indicators that at least some market participants were rethinking the consensus that the Fed is set to leave its stimulus measures unchanged until at least until early next year. Stocks also fell.
Economists at Barclays Capital in New York and BMO Nesbitt Burns in Toronto, who assume the Fed will leave its bond-buying program in place until March, acknowledged after the latest policy statement that tapering in December is possible.
“Perhaps a December taper isn’t quite as out of the question as we had previously thought,” Paul Ashworth, chief U.S. economist at research firm Capital Economics, advised clients in an analysis of the Fed decision. “We still think sometime early next year is the most likely outcome, but the balance of risks just shifted a little.”
The Fed stunned most of Wall Street in September by opting to leave its asset-purchase program – an interest-rate-supressing policy called quantitative easing, or QE – unaltered.
It turned out that investors and analysts had got ahead of themselves, misreading statements from Fed officials as proof the central bank was ready to start the long path back to a more normal policy setting. In the weeks ahead of the September meeting, interest rates had risen sharply in anticipation of tighter policy. The Fed cited the jump in borrowing costs in its reasons for leaving QE unchanged.
That language was gone from Wednesday’s statement, reflecting the half-point decline in key borrowing rates since the Fed’s September surprise. The only other significant change in language from September was the acknowledgement that the housing market had “slowed somewhat” in recent months.
“The committee decided to await more evidence that progress will be sustained before adjusting the pace of its asset purchases,” policy makers said.
The Fed also left unchanged forward guidance that it will keep its benchmark lending rate near zero at least until the unemployment rate drops to 6.5 per cent. Nine of 10 voting members of the committee backed the decision to leave current stimulus measures in place. Esther George, the president of the Kansas City Fed, voted against, citing worries about stoking longer term inflation.
There is little evidence to support Ms. George’s fears, as measures of inflation suggest there is little danger of prices threatening the Fed’s 2-per-cent target.
New government numbers Wednesday showed the consumer price index increased 1.2 per cent in September from a year ago, one of the slowest rates in four years. The “core” rate, which eliminates volatile food and energy prices from the mix, rose 1.7 per cent from September 2012, little changed from its reading in recent months.
Economic growth, on the other hand, could be flagging, explaining why most analysts predict the Fed will leave QE unchanged until March.
Private employers created 130,000 jobs in October, compared with 145,000 in August, ADP Research Institute, an arm of payroll processor Automatic Data Processing Inc., said Wednesday in its latest monthly hiring survey. The most recent monthly surveys by the Labor Department suggest employment growth decelerated over the summer, handing the Fed a reason to keep stimulus in place. The central bank has stated clearly for a year that it won’t alter is bond-buying program until it sees substantial improvement in hiring.