The US Federal Reserve Open Market Committee (FOMC) - Key decision

at its meeting on September 18, 2013

Eduardo Petazze
Postscript
The Fed, in its meeting of September 18, has remained unchanged its asset purchase program for the month of
October 2013

Abstract
Analysis in advance of the fundamentals of the FOMC's probable decision to reduce from October 2013
purchase program of $ 85 billion a month (in agency mortgage-backed securities of $ 40 billion and in longerterm Treasury securities of $ 45 billion) to $ 75 billion a month

Background
In the press conference June 19, 2013, Ben Bernanke explained the intention of the FMOC, to eliminate the
QE program of $ 85 billion by mid-2014, estimating that at that time they would meet the objectives of
achieving a rate of unemployment in or about less than 7%.
Supported in macroeconomic projections of FOMC members (pdf, 5 pages), the minutes of June meeting
gathered the following statement:
"... most participants thought that the Chairman, during his postmeeting press conference, should
describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes
broadly in line with the Committee's expectations.
"In addition, he would make clear that decisions about asset purchases and other policy tools
would continue to be dependent on the Committee's ongoing assessment of the economic outlook.
"He would also draw the distinction between the asset purchase program and the forward guidance
regarding the target for the federal funds rate, noting that the Committee anticipates that there will
be a considerable time between the end of asset purchases and the time when it becomes
appropriate to increase the target for the federal funds rate."

Issues to discuss
Five key aspects should be analyzed:
1. If indeed the U.S. economy is on track to a reduction in the unemployment rate below 7%
2. If you can effectively dissociate the level of growth of the money supply to the level of the interest
rate.
3. If there is a risk that monetary policy (for the growth rate of the money supply or the level of the
interest rate), adversely affects the inflation target.
4. If there is a risk that monetary policy generates bubbles in various markets (commodities, stocks,
real estate, etc..)
5. If there are other risks associated with a change in the monetary policy of the Fed

Analysis
1. In our paper "THE U.S. EMPLOYMENT SITUATION - JULY 2013" (and its predecessor "U.S. Employment
Situation"), it is projected the unemployment rate on a declining during 2013, the projected levels by December 2013
presume that by 2014 there will a high probability to meet Fed projections on unemployment.

2. In our paper "Monitoring the Perception of Future International Liquidity", we analyze the link between
money supply and interest rate, concluding that the disconnect between money supply and interest rate affects the
transmission mechanism of monetary policy to the market

3. We analyze the evolution of prices, monetary policy purposes, through the implicit deflator prices of personal
consumption expenditures.
The table below shows the recent evolution of index

2009=100
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13

Price Index of Personal consumption expenditures (PCE)

PCE
Goods
Services
PCE Y/Y
Goods Y/Y
105.22
106.27
104.70
2.5%
3.0%
105.47
106.70
104.86
2.4%
2.9%
105.72
107.07
105.05
2.3%
2.5%
105.73
106.71
105.25
2.0%
1.6%
105.68
106.22
105.42
1.6%
0.7%
105.84
106.17
105.69
1.6%
0.5%
105.87
106.01
105.81
1.5%
0.2%
106.20
106.74
105.94
1.6%
0.6%
106.51
107.41
106.07
1.7%
1.0%
106.70
107.49
106.32
1.8%
1.3%
106.58
106.75
106.50
1.6%
0.5%
106.59
106.47
106.66
1.5%
0.4%
106.66
106.27
106.88
1.4%
-0.0%
107.08
107.13
107.07
1.5%
0.4%
106.98
106.53
107.23
1.2%
-0.5%
106.71
105.57
107.31
0.9%
-1.1%
106.81
105.44
107.53
1.1%
-0.7%
107.24
106.21
107.78
1.3%
0.0%

Services Y/Y
2.2%
2.2%
2.2%
2.2%
2.1%
2.2%
2.2%
2.1%
2.0%
2.1%
2.1%
2.1%
2.1%
2.1%
2.1%
2.0%
2.0%
2.0%

3
In terms of prices of goods, the projected levels until December 2013 for the use of manufacturing
capacity (around 77% - see our paper "U.S. - Industrail Production and Installed Capacity
Utilization"), do not assume that inflationary pressure is generated as a result of overheating of the
demand for goods.
In terms of prices of services, there is some risk that the level of growth during 2014 exceeds the current
brand around 2% a year, as a result of increased demand and continuing a recovery trend in relative
prices.
However, globally considered, we share the Fed's projection in the sense that the PCE inflation will not
exceed (significantly) the target of 2% per year during 2014.

4. In our paper "Monitoring Bubbles in the Stock Market" analyzed the situation of the U.S. stock market,
particularly the S&P 500, to determine that there is no risk of buble in the prices of shares, requiring a change in
monetary policy.
The following is an updated summary of the table presented:

Quarter
2011Q1

Price / Operating Earnings Ratio (PER)

PER last 4
standardized
PER next 4
standardized
quarter
indicator
quarter
indicator
15.25
-0.75
13.51
-0.66

2011Q2

14.53

-0.93

13.38

-0.68

2011Q3

11.95

-1.58

11.62

-0.97

2011Q4

13.04

-1.31

12.99

-0.74

2012Q1

14.35

-0.97

14.32

-0.53

2012Q2

13.80

-1.11

13.72

-0.62

2012Q3

14.79

-0.86

14.06

-0.57

2012Q4

14.48

-0.94

12.94

-0.75

2013Q1

15.96

-0.57

14.09

-0.56

2013Q2

16.18

-0.51

13.96

-0.58

2013Q3

16.13

-0.52

13.92

-0.59

Average (2000Q4 2013Q3)

18.18
-0.00
Std. Deviation (2000Q4 2013Q3)
3.93
1.00
Signals for color reference :
Stable
Decreasing
Note: S&P 500 index for 2013Q3 as if the price of the August 20, 2013

17.55
6.14

-0.00
1.00
Overcooling

Cool

4
5. The propensity to save
The following table shows the evolution of the relationship between Disposable Income and PCE
Personal Income and Its Disposition billions of dollars SAAR
Disposable
income
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2

9,187.5
9,321.8
9,472.4
9,625.3
9,890.7
9,981.9
10,082.0
10,196.2
10,358.9
10,461.6
10,548.1
10,662.9
10,832.3
11,175.5
11,031.8
10,941.8
10,843.0
10,973.5
10,930.2
11,001.9
11,048.7
11,206.4
11,292.6
11,427.1
11,653.9
11,748.6
11,862.1
11,884.8
12,085.7
12,171.9
12,205.1
12,520.4
12,288.9
12,393.0

PCE
8,573.5
8,720.6
8,882.0
8,985.3
9,128.1
9,247.2
9,369.6
9,444.9
9,588.5
9,696.7
9,790.2
9,902.5
9,967.1
10,090.4
10,113.2
9,851.3
9,763.3
9,764.9
9,887.4
9,956.2
10,042.3
10,134.7
10,234.3
10,396.3
10,527.1
10,662.6
10,778.6
10,878.9
11,019.1
11,100.2
11,193.6
11,285.5
11,379.2
11,430.3

PCE /
Disponsable
93.32%
93.55%
93.77%
93.35%
92.29%
92.64%
92.93%
92.63%
92.56%
92.69%
92.81%
92.87%
92.01%
90.29%
91.67%
90.03%
90.04%
88.99%
90.46%
90.50%
90.89%
90.44%
90.63%
90.98%
90.33%
90.76%
90.87%
91.54%
91.17%
91.20%
91.71%
90.14%
92.60%
92.23%

Interest
payments
239.7
250.0
253.1
252.4
263.2
267.8
277.2
292.3
288.1
304.6
318.1
312.6
301.0
291.8
292.2
273.5
271.9
277.6
279.2
267.1
259.2
252.4
246.8
244.7
251.0
247.7
248.7
244.5
248.6
247.0
250.7
247.3
250.4
244.4

Transfer
payments
119.2
119.4
119.7
121.7
121.8
128.2
129.8
133.2
137.4
139.3
141.4
143.0
147.0
150.4
152.8
145.5
147.0
148.7
149.6
153.1
158.4
155.2
156.5
157.4
157.9
159.2
158.5
161.8
160.7
160.8
156.7
163.4
165.3
164.9

Saving
255.2
231.9
217.6
265.9
377.6
338.7
305.4
325.9
344.8
321.0
298.4
304.8
417.2
643.0
473.6
671.5
660.9
782.3
614.1
625.4
588.9
664.0
655.2
628.7
717.9
679.1
676.2
599.6
657.3
663.9
604.1
824.1
494.0
553.4

Saving /
Disposable
Income
2.78%
2.49%
2.30%
2.76%
3.82%
3.39%
3.03%
3.20%
3.33%
3.07%
2.83%
2.86%
3.85%
5.75%
4.29%
6.14%
6.10%
7.13%
5.62%
5.68%
5.33%
5.93%
5.80%
5.50%
6.16%
5.78%
5.70%
5.05%
5.44%
5.45%
4.95%
6.58%
4.02%
4.47%

Just in the first half of 2013 has been recovered percentage level of disposable income intended for personal
consumption expenditures, but still below 2005 levels.
We estimate that there is a risk that, as a result of an increase in the rate of long-term interest in the U.S.
(derived from an adjustment to the yield curve by reducing the rate of monetary expansion), can thwart the
possibility of regain a level of consumption around 93% of disposable income.
This level is closely associated with the possibility of sustaining long-term economic growth rates
that exceed the rate of natural population growth.

In summary
The decision taken by the Federal Reserve on September 18 starting a gradual reduction in their purchasing
programs have solid foundations in meeting the goals that were set at the beginning of the program.
However, there is no risk in terms of inflation and speculative bubbles, which would force the Fed to take
such a decision.
By contrast, there are certain risks that a lower rate of growth of the money supply produces a decoupling of
short interest rates and long rates of interest, and affect the propensity to save, a fundamental component of the
impulse for GDP growth, already hard hit by the automatic sequestration budget programs
5