The Federal Open Market Committee released ia "Statement Regarding Purchases of Treasury Securities and Agency Mortgage-Backed Securities," March 19.
The FOMC maintained its symmetrical outlook on inflation by retaining language indicating that price levels running persistently below its 2% target could pose risks to economic performance. As was widely expected the Fed therefore determined it should further reduce the monthly volume of bonds purchased by a total of $10 billion to $55 billion, still exerting downward pressure on the level of interest rates.
The statement suggests that the committee may remain on hold for a substantial period of time. “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.”
Minneapolis Fed Chief Narayana Kocherlakota disagreed with maintaining the 6-1/2% threshold in the statement feeing it weakened the committee’s credibility to return inflation to the 2-5% target from below and fosters policy uncertainty that hinders economic activity. The bond market immediately sold off in response to the statement, but appears to be taking the opposite view to Mr. Kocherlakota sensing perhaps that short-term rates are set to move higher. The shift higher in bond yields seems at odds with the dovish tone to the statement.
There is little sign of a shift in expectations of a rate move. Thirteen members predict 2015 will be the lift-off date according to the latest projections among the 17 committee members--that’s one more than in December. While the dispersion for end-2016 appears to be slightly higher at 2%. In the longer-run forecast the cluster of votes remains firmly pegged around 4%.