Mark Thoma is disappointed

Genevieve Signoret

Mark Thoma has already commented on the Fed statement:

As expected, there was no change in Fed policy. QE2 will end on schedule on June 30, the Fed won’t begin reversing QE1 and QE2 yet, i.e. it won’t reduce the size of its balance sheet, it gave no hint at all of willingness to move on to QE3, and interest rates will remain low for an “extended period.”

There were, however, some changes to note in the press release relative the previous meeting. In particular, the statement notes that “recent labor market indicators have been weaker than anticipated,” but the Fed attributes this to temporary factors (as I’ve noted, I think that it is a mistake). Thus, although the Fed has downgraded its forecast, it is looking through the current weakness to — cross your fingers — better times just around the corner. Thus, the Fed sees no need for further easing at this time.

In addition, the Fed says that “Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate.” Thus, while the Fed is also viewing recent price movements as temporary (I agree with this assessment), they clearly have their eye on inflation. This also works against any inclination toward further easing.

I had hoped to see more acknowledgement that the current soft patch may turn out to be something more significant than a temporary aberration in the numbers, and some hint of willingness to ease further should those worries come true. But the Fed shows no such willingness, and the main question is when they might begin tightening policy by reversing QE1 and QE2 rather than when they might ease further.

I’ll react to Mark and to the Fed after the live press conference at 1:15 Mexico City time.