Fed's Taper Sends Mixed Messages on Economy
December 19, 2013


...The move was generally seen as a sign that the economy is doing better. In fact, after an initial dip, the Dow saw triple-digit gains after the announcement. But some experts cautioned not to be too optimistic, noting another piece of the announcement stating that inflation isn't living up to expectations and interest rates will have to be kept low for the foreseeable future.

“They really made a nod to the fact that inflation has been running below target,” Heidi Learner of commercial real estate brokerage Studley Inc. told Law360 on Thursday. “Reducing the core inflation forecasts somewhat is not negative, because everyone is enjoying the benefit of low inflation, but the concern is what happens if we were to slip into a period of persistent disinflation that becomes outright deflation.”

We're not there yet, she said, but it's significant that the Fed acknowledged that while the economy is recovering, inflation hasn't quite kept up with the agency's longer-term goal.

The Fed has a dual mandate to monitor unemployment and price stability, and while it lowered its unemployment forecast through 2016, it will be paying closer attention to the price-stability question.

Before Wednesday's announcement, the generally accepted plan was that once unemployment dipped below 6.5 percent, the Fed would loosen its control of interest rates and scale back more significantly on its asset buying program.

“Now [the Fed] really clarified its whole stance,” Learner said. “It removes a lot of uncertainty for the market, which is always a good thing. The equity market was certainly happy to see the news [Wednesday], and I think this means 'lower for longer' for the bond market too...”

Fed's Taper Sends Mixed Message On Economy

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