On Wednesday, the Federal Open Market Committee released its latest policy statement, saying, as expected, that it would reduce its monthly bond purchases to $US25 billion.
But as the New York Times’ Binyamin Appelbaum pointed out, it seemed to shrug off recent signs of an improving economy, giving little indication that it would alter current near-zero short-term interest rates before 2015.
Philadelphia Fed President Charles Plosser was the lone dissenter to the statement.
Now we know why.
In a statement released Friday, Plosser said the Fed needed to reevaluate its current policy path given the stronger data, and was leaving itself with too-little room to manoeuvre.
The economy has improved significantly this year, and inflation and unemployment have moved much closer to the FOMC’s longer-term goals. However, neither the pace of the reduction in asset purchases nor its end date has been modified, nor has the time-dependent language associated with the projected liftoff of the federal funds rate been adjusted.
Thus, I cast a dissenting vote because I opposed retaining the statement language that reads “…it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”
I viewed such language as an inappropriate characterization of the future path of policy and so may limit the Committee’s flexibility going forward.
Current interest rates do not reflect how many investors have positioned themselves, echoing the notion from some market commentators that the Fed is “behind the curve.”
With the economy having already reached my year-end 2014 forecast for inflation and unemployment, and appearing to be well on its way toward achieving my 2015 forecasts approximately a year ahead of schedule, the funds rate setting remains well behind what I consider to be appropriate given our goals.
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