In the May 1, 2013 statement, the last two sentences of the first paragraph reads as follows:
“Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Compare this to the June statement which reads as follows:
“Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”
The other change comes at the end of the second paragraph. The May statement reads:
“The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.”
Compare this to the June statement which reads:
“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.”
These are really the only 2 differences between the two statements. That little change from the last paragraph is saying that the FOMC sees the economy as improving. Investors are taking that as a signal that the so-called quantitative easing of $85 billion per month is going to slow down at some point, perhaps as early as the end of the calendar year. Market jitters over the Fed reducing its rate of monetary inflation sent stocks and bonds down significantly for the day.
The one other interesting change from the previous statement is the voting of the members. In May, there was only one dissenting vote and that was by Esther L. George, who actually shows some concern for inflation. In this latest June statement, there was another dissenting vote, in addition to George.
James Bullard dissented because he “believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings”. This is truly remarkable that there is someone on the committee who actually believes that the Fed needs to inflate even more.
Other than that, things remain the same. The Fed is still buying $45 billion per month in longer-term treasuries and $40 billion in mortgage-backed securities to bail out the banks (although they don’t say it like that). In addition, the federal funds rate will continue to stay between 0 and .25 percent for a long while.
One thing I have noted is that many people are under the impression that the Fed is going to keep up its monetary inflation of $85 billion per month as long as unemployment stays above 6.5% and price inflation expectations stay below 2.5%. I have even read more than one libertarian saying this. It is incorrect. This only applies to the federal funds rate and not to the monetary inflation. The FOMC statement is clear that these measures are for keeping the federal funds rate below .25%, which is essentially meaningless because the Fed is not really controlling that rate now anyway. It could raise this rate if it decided to pay banks a higher interest rate for excess reserves, but changes in the monetary base have little or no effect on the federal funds rate because banks are holding huge amounts of excess reserves.
In conclusion, not much has changed. Investors didn’t like the latest statement, but it should be no surprise that the Fed could not keep pumping in new money at the rate of $1 trillion per year. We are still living in unprecedented times and it will be interesting and painful to watch this whole thing play out.