Fed preview: More unified this year?
- The first monetary policy meeting of 2013 should be rather quiet.
- The last meeting of 2012 featured two big moves to boost the economy.
- The policymaking board gets a few new faces for 2013.
The Federal Reserve's policymaking group is poised for a quiet first meeting of the year after ending 2012 with two key moves aimed at buoying the economy and alleviating interest rate uncertainty.
This week, the Federal Open Market Committee, or FOMC, will welcome four new Federal Reserve bank presidents and provide its longer-term goals and monetary policy. Those are traditional actions for the first meeting of the year. The FOMC also may debate the appropriate time to reduce its bond-buying program designed to push interest rates lower, but that discussion may stay internal for now.
The meeting will pale in action compared with the previous one, when the group expanded its current rate-reducing strategy and tied the movement of a benchmark rate to the unemployment rate.
At that meeting, in December, the FOMC decided to buy $45 billion in Treasuries each month -- in addition to buying $40 billion a month in mortgage-backed securities -- as part of its third round of quantitative easing, or QE3. With quantitative easing, the Fed prints more money to buy more securities to drive down interest rates. The group also said it won't raise the federal funds rate, currently near zero percent, until the unemployment rate falls to 6.5 percent. Interest rates on consumer and business loans are tied to that rate.
"The committee has made a lot of deliveries lately and has set a whole lot of goals that have not been achieved," says Robert Shapiro, chairman of economic advisory firm Sonecon LLC and former undersecretary of commerce for economic affairs. "So I don't see any additional changes coming out of this meeting."
Changing of the guard
Every year, the FOMC rotates the voting Fed bank presidents, who serve one-year terms. The 2013 committee will include Charles Evans from the Chicago Fed; Esther George from the Kansas City, Mo., Fed; Eric Rosengren from the Boston Fed; and James Bullard from the St. Louis Fed. The rest of the committee is permanently made up of the seven-member Board of Governors (including Chairman Ben Bernanke) and the New York Fed bank president.
The group will say goodbye to Dennis Lockhart of Atlanta, Sandra Pianalto of Cleveland, John Williams of San Francisco and Jeffrey Lacker of Richmond, Va. Lacker was probably the loneliest man on last year's voting committee, being the sole member to cast votes against all policy moves in 2012 for fear of inciting inflation.
The makeup of the new voting bloc won't have such a consistent dissenting voice as Lacker, although George has the "potential to not be as supportive" of QE3, says John Stewart, managing director of Vantage Economics. Otherwise, the new members generally support the current monetary policy and, even if George splits with the group, it won't be enough to change the FOMC's efforts, Stewart says.
The FOMC will also reaffirm or adjust its long-term goals and policy strategy, a tradition the group started at last year's January meeting. The group's mission is to fulfill its congressional mandate to foster maximum employment, stable prices and moderate long-term interest rates.
Last year, the group set its inflation rate goal at 2 percent and put the normal rate of unemployment between 5.2 percent and 6 percent. These markers can change if the committee deems it necessary.
The most interesting part of the meeting will probably stay behind closed doors until the minutes of the meeting are published. Minutes from December's meeting showed that the group discussed when QE3 should end, with varied opinions within the group. Those discussions will likely continue this week.
"The Fed has to revisit their exit-plan strategy," says Paul Edelstein, director of financial economics at IHS Global Insight. "But are they going to announce something this week? It's possible, but I'm not expecting it."
Incoming voting member Rosengren recently floated that the appropriate time to begin scaling back QE3 is when the unemployment rate hits 7.25 percent. But that view has yet to be embraced by the rest of the FOMC. And there's still time as the unemployment rate hovers at a stubbornly high 7.8 percent.
"At this point," says Edelstein, "there's no point to monkey around with quantitative easing."