The FOMC reaffirms its asset purchase program


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March 20, 2013

The FOMC reaffirms its asset purchase program The Fed left interest rates at zero and its asset purchase program unchanged at US$85 bn/month (of which $40 bn is MBS debt and $45bn is long-term Treasuries). It also reiterated that "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored." The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Fed firmed up somewhat its stance on keeping up the asset purchases “until” the outlook for the labour market has improved substantially. Note that in the prior statement, the Fed said that it would continue its purchases “if” the labour market does not improve substantially. Esther George was again the only dissenter, concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances. Explaining its decision to maintain its stance, the Fed acknowledged a return to moderate economic growth but continues to see downside risks to the economic outlook. The sequester is also acknowledged with the Fed stating that “fiscal policy has become somewhat more restrictive”. Fed’s new projections: The central tendency forecast for GDP growth (Q4/Q4) is now 2.3-2.8% in 2013 (versus 2.3-3.0% in its December update), 2.9-3.4% for 2014 (3.0-3.5% previously) and 2.9-3.7% for 2015 (3.0-3.7% previously). Despite the growth downgrades, the central tendency projections for the unemployment rate were lowered: 7.3-7.5% for 2013 (7.4-7.7% previously), 6.7-7.0% for 2014 (6.8-7.3% previously) and 6.0-6.5% for 2015 (6.0-6.6% previously). The projections show the jobless rate remaining above the 6.5% threshold for at least the next two years. Inflation forecasts for 2013 have been lowered a bit, but remain close to the Fed's 2% target and well below the 2.5% threshold through the projection horizon. While there's no information about voting and non-voting members' views, the FOMC presented information about how participants feel about the pace of policy firming going forward. Fifteen members see rates remaining below 1% by 2014 (same as last December). FOMC members view that the fed funds rate should be in the 3-4.5% range over the longer run, with the majority continuing to see the fed funds in the 4.0-4.5% range Fed Chairman Bernanke’s press conference A broad range of topics were discussed from “too big to fail” to inflation targeting. In regards to QE, the Chairman pointed out that it was difficult to provide quantitative thresholds that could help market participants judge when and at what pace the asset purchase program could be scaled down. Evaluating the potential costs of the program added to the complexity of providing numerical guidance. However, since the pace of the purchases will be revised and adjusted as the labour market will improve, financial markets should be able to adjust gradually to the evolving situation according to Chairman Bernanke. He said the FOMC will use a variety of metrics to measure how successful monetary policy is in achieving its objectives. As far as the stock market is concerned, he suggested that current valuation does not appear to be out of historical norm. Contrary to what many had expected, nothing was said in regards to when and how the Fed plans to bring back the size and composition of its portfolio in line with historical norms. The current situation in Cyprus was not perceived as a being a threat to the U.S. ECONOMIC AND STATEGY GROUP - 514.879.2529 Stéfane Marion, Chief Economist and Strategist General: National Bank Financial Markets is a business undertaken by National Bank Financial Inc. (“NBF”), an indirect wholly owned subsidiary of National Bank of Canada, and a division of National Bank of Canada.  This research has been produced by NBF. National Bank of Canada is a public company listed on Canadian stock exchanges  The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. 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FED POLICY MONITOR Bottom line: There was little change in the Fed’s statement or economic projections today. The improving economic backdrop notwithstanding, the FOMC reaffirmed its asset purchase program. This is the right thing to do at this juncture. While GDP growth will bounce back sharply in Q1, the outlook for the subsequent months (i.e. 2013 Q2) is less upbeat due to the likely inventory drawdown and the more restrictive nature of fiscal policy. We still think that growth in the second half of 2013 should return to above 2%, an outcome that depends on private sector hiring holding up. All told, the Fed’s message today remains friendly to risk assets. Stéfane Marion/Paul-André Pinsonnault Here is the press release: .. Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, 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 Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

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