Economy Watch: Tapering Continues, and So Do Low Interest Rates

By Dees Stribling, Contributing Editor

The Federal Open Market Committee said on Wednesday that U.S. economic growth slowed during the winter months, mainly because it’s been a hard winter. Also, labor market indicators were mixed but on balance showed further improvement, with the unemployment rate remaining a little too elevated for the Fed’s liking. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow.

The central bank also sounded a note that it’s been sounding for a while: Fiscal policy—namely, that thing called sequester—is stunting economic growth, although the extent of drag is diminishing. Inflation has been running below the committee’s longer-run objective (2 percent), but longer-term inflation expectations have remained stable. In fact, a little too stable: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance,” the statement said.

What does all that mean for tapering? Eventually, the Fed got to the point: come April, it’s going to knock another $10 billion off of its asset purchases. That is, beginning next month the Fed will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and buy longer-term Treasuries at a pace of $30 billion per month instead than $35 billion per month. At the current rate of diminishment, QE3 will be over by the third quarter.

The Fed also dealt with the question of interest rates. The short answer: they’re not going anywhere, certainly not up anytime soon. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” the statement said.

State coincident indexes almost all up

The Federal Reserve Bank of Philadelphia reported on Wednesday that the coincident indexes for 48 states increased month-over-moth in January 2014, and remained stable in two. None dropped. Over the past three months, the indexes increased in 50 states, and none dropped.

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic, calculates the Philly Fed. The four state-level variables in each coincident index are nonfarm payroll employment; average hours worked in manufacturing; the unemployment rate; and wage and salary disbursements deflated by the U.S. CPI. The trend for each state’s index is set to the trend of its gross domestic product, so long-term growth in the state’s index matches long-term growth in its GDP.

Investors didn’t seem to like what the FOMC had to say on Wednesday. Late in the day, Wall Street took a dive—after gains earlier in the week—with the Dow Jones Industrial Average losing 114.02 points, or 0.7 percent. The S&P 500 dropped 0.61 percent and the Nasdaq was down 0.59 percent.