The Federal Reserve stunned markets when it decided to not taper its $US85 billion a month asset purchasing program known as quantitative easing. The economic data simply did not support the decision to pull back the Fed’s accommodative monetary policy, Chairman Ben Bernanke said.
The Federal Open Market Committee (FOMC) saw improvement since a year ago, but “the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchase.”
In terms of monetary policy, 2013 will look a whole lot like 2012. But it was supposed to be a different kind of year.
Granted, their projections could still come true, but people generally seemed to feel 2013 would be more monumental economic year than it has been.
And the Fed clearly hasn’t seen enough change to alter its monetary policy course.
In fact, the committee has been steadily lowering its GDP projections for this year since December, when the central tendency call was for 2.3-3% growth in 2013. In March, the FOMC projected 2.3-2.8% growth; in June, 2.3-2.6%; and in September, 2.0-2.3%.
In June, the committee summed up some economic concerns: From the Fed minutes:
Among the downside risks for economic activity were the uncertain effects and future course of fiscal policy, the possibility of adverse developments in foreign economies, and concerns about the ability of the U.S. economy to weather potential future adverse shocks.
The “fiscal drag” the Fed referred to there has been a hot button issue all year. Many thought that the sequester would cause a major negative shock on the economy. And to a certain extent it has, with some estimating the sequester removed 1.75% from the economy this year. That means for the U.S. to have grown even in the range the Fed is currently projecting, “One must conclude that the underlying growth has accelerated sharply and may be running between 3.5%-4%,” wrote SocGen’s Aneta Markowsa in July.
So it could be that the Fed wasn’t expecting the fiscal drag to be quite as pronounced, and has been forced to lower its GDP projections accordingly.
Or, as the debt ceiling fast approaches, the Fed is worried about whether lawmakers will muck things up again.
But recent data has also suggested 2013 wasn’t the big year some were expecting.
The latest consumer confidence figure missed. According to the Conference Board’s Lynn Franco, “Concerns about the short-term outlook for both jobs and earnings resurfaced, while expectations for future business conditions were little changed.”
It’s hard to read a whole lot into one report, but its not the only economic report to come in as decidedly “meh.” The U.S. added a paltry 169K jobs in August, July’s figure was revised down sharply from 162K to 104K, and the participation rate fell again (now at a 35-year low). Unemployment dropped to 7.3%, largely thanks to people leaving the work force.
And economists agree that the ongoing government shutdown is only making things worse.
“We estimate the current shutdown would reduce growth by 0.2pp in Q4 on an annualized basis if it lasted a week, and 0.4pp if it lasted two weeks,” said Goldman Sachs’ Alec Phillips.
2013 was supposed to be the year, but as the Fed continues to pump the monetary policy gas pedal thanks to lukewarm economic metrics, maybe we’ll have better luck next year.