In a widely anticipated move, the Federal Reserve decided on Wednesday to make no changes with their monetary policy and wrote in a brief statement that the unemployment level remains elevated and the housing recovery has slowed somewhat in recent months.
Although the U.S. economy has faced pressure in recent weeks due to the fiscal showdown on Capitol Hill over the federal government shutdown, the raising of the debt ceiling, and the implementation of Obamacare, the Fed’s statement on Wednesday barely mentioned the fiscal drag on the economy.
“Fiscal policy is restraining economic growth” the Fed wrote.
In another sentence, there is only passing reference to the “fiscal retrenchment” over the past year correlating to the federal government sequester cuts which was parsed by bullish Fed comments about seeing improvement with economic activity, labor conditions, and the strength of the economy.
“Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy” the Fed wrote.
The Fed’s overall confidence in the strength of the economy must not be rock solid because in the next sentence, they signaled an entirely different message about more evidence being needed before they are ready to adjust the pace of their $85 billion monthly asset purchases, known as quantitative easing.
“However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”
The Fed said they will maintain their current monetary policy until the outlook for the labor market has improved substantially in a context of price stability and explained that “asset purchases are not on a preset course” and “remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”
The Fed sees the downside risks to the outlook for the economy and the labor market have diminished since last fall.
The Fed will keep rates at 0 to 1/4 percent as long as the unemployment level remains above 6.5 percent and inflation does not rise above 2.5 percent.
The latest inflation numbers released on Wednesday showed consumer prices over the past 12 months have risen just 1.2 percent, lower than a 1.5 percent annual increase in August and the smallest 12 month gain since April and far below the Fed’s 2 percent target.
Latest ADP figures for this month released yesterday showed that private employers added 130,000 jobs this month, the lowest level since April, and below last month’s 145,000.
The Labor Department reported on October 22nd that the U.S. economy added 148,000 non-farm payroll jobs in September, lower than the estimate of 183,000 while the unemployment rate lowered to 7.2 percent from 7.3 percent.
Over the year, the labor force participation rate has declined by 0.4 percentage point.
Earlier this week, pending home sales and retail sales for the month of September showed some weakness.
Bob Keiser from S&P Capital IQ said on CNBC’s Closing Bell that the Federal Reserve is in a tough spot with their taper plans amid a weaker trend of employment data in the second half of 2013.
“We wrote two bi-weekly lookout reports back in July. We said these are extremely complicating times for the Federal Reserve. When you said we are dependent on data you are absolutely right” Keiser said.
“The average monthly rate of job creation in the first quarter of this year was over 200,000. That pace slipped to 180,000 in the second quarter, now we are about 150,000” Keiser continued.
“So the trend is not moving in the direction that lets the Fed out. The Fed is caught right now between a rock and a hard place” Keiser said.
The Fed will meet next on December 17-18th.