Does the Fed Want a Correction?

The big news today comes directly from the Federal Reserve. As most of us expected, the Fed announced today that it was tapering its bond-buying program by $10 billion per month, down to asset purchases of just $55 billion per month. The move is part of the Fed’s commitment to turn down the money printing spigot gradually, and without causing much of a shock to the financial system.

In today’s Fed minutes, however, there was a significant change in the central bank’s forward guidance.
The Federal Open Market Committee, or FOMC, actually removed the previous threshold of a 6.5% unemployment rate as a trigger to prompt an interest rate rise. Here’s the money quote from the FOMC statement:

“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

In its previous statement, the Fed said it would begin to raise rates “well past” the time unemployment falls to 6.5%. The elimination of the 6.5% threshold might appear to be a bit “dovish” on the surface. But actually what I think is more likely is that the Fed is being a bit more “hawkish” than most think.

Read more about what the Federal Reserve’s policy change means for the economy at Eagle Daily Investor.