'Fed Has a Policy Problem'
NEW YORK ( TheStreet) -- The Federal Reserve left interest rates unchanged as it said the labor market is showing signs of improvement and suggested that the economy is returning to moderate economic growth.
The Federal Open Market Committee -- the Fed's policy making wing -- noted that downside risks to the outlook for the economy and the labor market have diminished since the fall, but the Fed is still having trouble relaying what it ultimately wants to do to the markets.
"The Fed has a policy problem," said Robert Brusca, chief economist at FAO Economics. "The talk about the downside risks as having diminished is a change, and the first step towards tapering." However, Brusca noted that the Fed, which now has dissenters towards policy, including Esther George and James Bullard, is not effectively fulfilling its dual mandate.
Bullard dissented because he believes the Federal Reserve is not doing enough to protect its inflation target, and the Fed risks losing credibility. "The Fed is being less accommodative, and Bullard is reminding the Fed of its credibility," Brusca said during the interview. "The Fed needs to be either be more accomodative or explain why inflation is not relevant at this time."
TheStreet also broke down the Fed's announcement with FAO Chief Economist Robert Brusca.
Below is the text to the FOMC's announcement. Click through here for the Fed's latest economic projection.
Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.