The Federal Reserve has once again decided to maintain its latest round of quantitative easing, along with near-zero interest rates. At the conclusion of its latest two-day meeting, the central bank's Federal Open Market Committee announced Wednesday that it would continue its $85 billion monthly asset purchases known as QE3.
In a statement on the decision, the FOMC characterized economic activity as expanding "at a moderate pace," noting some improvement in the labor market despite a high unemployment rate, as well as increases in household spending. However, the committee also noted a slowing housing recovery, as well as the fact that "fiscal policy is restraining economic growth."
Given the headwinds coming out of Washington, the committee still said the recovery is moving in the right direction, and that a taper in asset purchases is coming...just not right now.
"Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy," the committee said in its statement. "However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
That progress might be slow in coming. The September job reports suggest a slowdown in hiring, and consumer confidence fell off steeply in October, during the partial government shutdown and debt ceiling brinksmanship in Washington. In addition, economists estimate the debt limit debate and shutdown cut several tenths of a percentage point off of fourth-quarter growth.
Now all that is left to do is what analysts and market-watchers have been doing for months: speculate about when tapering will happen. Federal Reserve Chairman Ben Bernanke in June had said tapering was a possibility before the end of the year, if economic conditions continued to improve. Of course, that improvement did not hold, with job numbers softening in the summer and fall, not to mention continued fiscal wrangling from lawmakers.
Still, the global economic community has remained watchful for any sign that the Fed would dial back its purchases. While some analysts predicted a taper in September, the Fed held firm and maintained the stimulus program, a move that one economist says has proved fortunate.
"Certainly they proved pretty prescient. They did talk about the impact of fiscal policy and the potential for a shutdown, but I don't think most people were expecting it to happen," says Gus Faucher, senior macroeconomist at PNC Financial Services Group. "In retrospect it was the correct decision, given the shutdown.
Recent weakness in indicators, in addition to the delays and distortions the shutdown introduced to economic data releases, says one economist, could mean "tapering" of QE3 will wait until at least the Fed's next meeting, in December, if not early 2014.
"Just how long tapering is off the table will depend on the read the fed gets on the economy," says Greg McBride, senior financial analyst at Bankrate.com. "First we have to catch up on economic releases, and then we probably need another month's worth of data by the December meeting, theoretically they would have the data they would need."
The fed also has a meeting scheduled at the end of January, but given all of the shakeups taking place in Washington at the start of 2014 – the likely handover of the Fed chairmanship to Janet Yellen, not to mention the potential for yet more rocky debt ceiling and budget debates – McBride says it's easy to see why some analysts don't foresee tapering until March.
A lack of certainty in fiscal policy has helped to push the Federal Reserve to the forefront of economic policy discussions in recent years. Yet though the central bank is preparing to wind down its asset purchases, it's not likely to fade from view anytime soon, as stimulus in the form of low interest rates will remain in place. as well as fears of inflation born of the Fed's easy money policies. Meanwhile, the stock markets have been setting new record highs as investors gamble the Fed will not act anytime soon.
"The federal funds rate is still going to be zero until 2015," says Faucher. "There's still going to be pressure on the Fed, [and] people are still going to be worried about inflation, which is not existent, but they're still worried about it."
For the FOMC's part, members acknowledge that inflation is a concern, but they do not foresee it in the immediate future. The Fed's statement pointed out that "inflation has been running below the Committee's longer-run objective," but noted that the committee also "anticipates that inflation will move back toward its objective over the medium term."