Goldman Analyzes The Fed’s “Unexpected” Decision

Goldman Analyzes The Fed’s “Unexpected” Decision

Fresh from Jan Hatzius’ printing press:

BOTTOM LINE: The FOMC unexpectedly decided not to taper the rate of its asset purchases at today’s meeting, preferring to wait for further confirmation of improvement in the outlook. There was no change to the forward guidance on the federal funds rate. The Summary of Economic Projections showed a decline in the central tendency expectation for the year-end 2015 fed funds rate, and the 2016 rate suggested a cautious pace of rate hikes once they begin.


1. The FOMC unexpectedly decided to leave its monthly rate of asset purchases unchanged for both Treasuries ($45bn) and MBS ($40bn) at today’s meeting. The statement noted that “the Committee decided to await more evidence that progress [on improvement in economic activity and labor market conditions] will be sustained before adjusting the pace of its purchases.” However, the Committee signaled that reductions in asset purchases are likely in the near term, noting that “in judging when to moderate the pace of asset purchases, the Committee will at its coming meetings assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.” Previously, this language noted that the Committee was prepared to “increase or reduce the pace of asset purchases” and did not refer to “coming meetings.”

2. The FOMC did not change its forward guidance on the federal funds rate, retaining the language that the Committee expects to keep rates on hold at least as long as unemployment remains above 6.5% and projected inflation one to two years ahead is not greater than 2.5%.

3. The characterization of economic activity in the statement was slightly more tepid than in the July statement. The statement noted that “some indicators of labor market conditions” have shown further improvement in recent months, slightly more cautious language than used in the last statement. In addition mortgage rates “have risen further,” although the Committee retained the language that “the housing sector has been strengthening,” despite more mixed recent housing data. The statement explicitly noted that “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”

4. With regard to participants’ economic projections, the mid-point of the central tendency of the unemployment rate was lowered a touch to 7.2% in 2013Q4 and 6.6% in 2014Q4, while real GDP growth was lowered by 0.3pp to 2.15% at end-2013 and 0.25pp to 3.0% at end-2014. In 2016—included for the first time—participants expected 2.85% real GDP growth, 1.95% core inflation, and 5.65% unemployment, only 0.15pp above the longer-run unemployment rate, which was lowered to 5.5%. Projections for real GDP growth in the longer term edged down slightly to 2.35% from 2.4% previously.

5. Participants’ forecasts for the funds rate (the “dots”) remained at 0.13% (average excluding the four highest projections) at end-2013 and end-2014 and fell 15bp to 0.81% at end-2015. Participants expected the funds rate to rise to 1.81% by end-2016, well below participants’ 3.25-4.25% range for the longer-run rate.

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