The FOMC delivered as expected today, with virtually no change to policy. The tapering continues with another $10 billion cut to the pace of asset purchases, which was essentially the only change to the FOMC statement aside from the description of the economy. The Wall Street Journal tracks the changes here.
The Fed downgraded their GDP forecast, as expected given the weak Q1 numbers. They did not include any upward offsets in subsequent years. Consequently, the expected trajectory of output falls further short of current estimates of potential:
Expect estimates of potential output to come down even further. In contrast, the unemployment forecast was revised to the more optimistic side:
while the inflation forecast was virtually unchanged. As might be expected given an improving unemployment outlook, the interest rate projections were slightly more hawkish. Still, Yellen cautioned against reading this as a change in the outlook, instead attributing it to a change in FOMC members. The unstated implication is that the FOMC has moved in a slightly more hawkish direction, raising the possibility that Yellen could become more isolated in the months ahead in her generally dovish stance, assuming of course that the tension between the Fed's stated policy goals and the stance of policy continues to grow.
And, as Joe Weisenthal at Business Insider notes, Yellen again proves she is indeed a dove. She dismissed recently higher inflation readings as noise, specifically drew attention to broad measures of unemployment, and said (correctly) that wage growth itself does not necessarily indicate inflation pressures would be far behind. No indication that she is in any rush to raise rates whatsoever.
Bottom Line: Policy remains the same -- the Fed continues to expect a long-period of relatively low interest rates. Given current unemployment and inflation numbers, I continue to expect the risk remains on the more hawkish side of that story. But that is my assessment of the risk, not of the baseline.