Federal Reserve policy makers will likely leave intact their delicately worded easy-money message when they meet next week, despite a surprisingly sharp drop in US unemployment that threatens to make a central part of that message irrelevant.
Top Fed officials believe their landmark decision last month to reduce the pace of the US central bank’s bond-buying stimulus was well received by financial markets. That, in turn, allows them to make another $10-billion cut to the bank’s monthly bond purchases at the January 28-29 meeting without needing to adjust their promise to keep interest rates low in the future.
As the promise stands, the Fed has said it expects to keep rates near zero until well past the time US unemployment falls below 6.5%, especially if inflation remains low. Joblessness dropped faster than expected last year and hit 6.7% in December, down from 7.0% the previous month.
Had the drop in unemployment sparked a selloff in bonds, the Fed might have reinforced its commitment to stimulus by tampering with its low-rates promise. But investors appear to have interpreted the data as a one-off event that would not prompt a quicker-than-expected policy tightening.
So policymakers at next week’s meeting — Fed chairman Ben Bernanke’s last before handing the reins to vice-chair Janet Yellen — will probably stick to the same message, saving any big changes for the future.
“No, I don’t think we should revise” the low-rates promise, Philadelphia Fed president Charles Plosser told reporters last week. “I think we need to just stick with what we’ve got.”
Another cut to the purchase of Treasuries and mortgage-backed securities, from $75 billion per month now to $65 billion, is all but certain next week, based on policymakers’ recent comments. That’s not to say the move would be without controversy. Minneapolis Fed president Narayana Kocherlakota may cast a dissenting vote, based on his recent call for more, not less, monetary stimulus.
But even the president of the Chicago Fed, Charles Evans, among the most doveish of the Fed’s 17 policymakers, is on board with measured reductions to the bond purchases. He has said that, if anything, investors should brace for bigger cuts later this year.
One simple way the Fed could help shape rate expectations is to release Fed officials’ rate forecasts more frequently. The central bank began publishing policymakers’ quarterly rate projections in January 2011.
Right now market views appear to be in sync with the Fed’s own expectations, with traders in