As the Federal Reserve wrapped up a two-day meeting today, the Federal Open Market Committee (FOMC) continued debating the potential costs of quantitative easing, including the possibility its easy money policies will inflate asset market bubbles. Although many investors are worried about the potential impact of post-quantitative easing, Fed Chairman Ben Bernanke has made clear he still firmly believes the benefits are palpable, and the risks worth taking. Since December, the U.S. central bank has said it will keep rates near zero until the jobless rate falls to 6.5 percent and as long as inflation did not threaten to pierce 2.5 percent over a one- to two-year horizon.
In a statement released at 2 p.m. (1800 GMT), the Fed stated:
"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."
See the full statement here.
As Ben Bernanke's press conference commenced, columnists and reporters alike were eager to ask questions to the Federal Reserve Chairman about the continuation of the promulgated program. I have noted some below:
Q: What are you really looking for in "substantial" improvement in the labor market?
Bernanke: "We'll be looking for sustained improvement in a range of key labor-market indicators," he says, citing payrolls, unemployment, hiring rates and more. The Fed also will look at growth to look past short-term shocks.
Q: The stock market is hitting all-time highs. "I just want to know from you if I still have time to get in," a reporter asks. He adds: Is it good? Is it bad? Mission accomplished?
Bernanke: "We're not targeting asset prices. We're not measuring success in terms of the stock market." "Success is measured by the Fed's mandate, employment and price stability."
Q: Back to Cyprus: As a central banker, do you think it was appropriate or fair to impose a levy on every bank deposit, even the insured ones?
Bernanke: "I know they're grappling with a very difficult problem," "I think the issue they face is there's a pretty big financial hole, everyone understands there are certain risks with that." "There's probably no easy way to do it. We're going to keep monitoring that. But I don't enjoy them" with "that particular challenge."
One of my favorite questions from the press conference was when a reporter asked the Chairman the last time he talked to somebody that was unemployed.
Bernanke smirks and says, "Pretty recently, I have a relative who is unemployed and come from a small town in South Carolina that has taken a big hit from the recession." Bernanke used the opportunity to stress his concern about helping people who are unemployed.
Bernanke notes, as he has before, the Fed "may adjust the purchases month to month" in its bond-buying to "appropriately accommodate" the Fed's support for the economy. In a sense, the program is designed to provide the market with some sense of how the Fed interprets the economy's progress. If the economy gets worse after getting better, the Fed could adjust its bond-buying again.
Stocks rallied on the news of the Fed's statement - up 62 points during afternoon trading on Wednesday. Although many investors are happy that the Fed has elected to maintain their rate of buying $85 billion worth of bonds a month, many are overlooking the recent downgrade.
In conjunction with the statement, Central bankers released their new economic outlook, which now expects the U.S. economy to expand by 2.3% to 2.8% this year, 2.9% to 3.4% in 2014 and 2.9% and 3.7% in 2015. Those forecasts were revised slightly lower compared to projections prepared in December, which could indicate some slight uncertainty from the Federal Reserve.
Some of the Fed's members have opposed the latest round of bond buys, including 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. In a recent speech, Fed Board Governor Jeremy Stein highlighted the possibility that a bubble might already be forming in certain parts of the corporate bond market.
My Takeaways from the Fed's Statement
- Pedal To The Medal
The Fed's 6.5% unemployment threshold and its $85 billion bond-buying program remain in place. Its foot, in other words, remains pressed firmly on the accelerator.
- Where Do We Go From Here?
As mentioned above, the Committee lowered their forecasts from the December statement, indicating some doubt in the direction of the economy and QE program. Investors must pay attention to their outlook, which will ultimately suggest how the Fed feels about the direction of the economy.
- Same Old, Same Old
The statement from December was virtually identical to the one released for March. Differences included calling out Congress for the first time, saying that "fiscal policy has become somewhat more restrictive," implying that it will drag on growth. They also removed a reference to strains in global financial markets easing amid the recent hullabaloo over Cyprus.
Bernanke's message today was easy to predict: the QE program will not end anytime soon. All In all, the Fed meeting just reiterated what we knew all along and shows no signs of letting up until their economic mandates are satisfied. Many are anxiously waiting to see how consumer sentiment changes once the Fed decides to stop the promulgated QE program.
"The next step is where it will get interesting," said Mike Murphy of Rosecliff Capital. "Will the Fed be able to pass the baton to the economy and will the economy be able to run with it."
As asset prices reach new heights and consumer confidence soars, many are looking at the glass half-full and full of unwavering optimism. However, if history is ever a good indicator of future events, we must pay attention the decisions of the Fed in subsequent months and always prepare for the worst.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.