Thursday, October 30, 2014

Taking Credit
There were no surprises in yesterday’s FOMC statement, in my opinion. A few Fed watchers thought it was more hawkish than they expected. The statement noted: “Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.”

That’s not hawkish. It’s a fact and makes sense given that the FOMC wanted to give the QE program lots of credit for the improvement in the labor market now that it has been terminated. That notion was reinforced by the following comment: “The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program.” In other words, Mission accomplished.

I’m sure Fed officials were pleased by the headline for this story on Reuters: “Fed ends bond buying, shows confidence in U.S. recovery.” That’s undoubtedly the message they wanted to send.

The boilerplate “considerable time” clause remained in the latest statement:
The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
So inflation might remain lower than the FOMC expects. Then again, pay no attention to any of this so-called “forward guidance” because it all depends: “However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

President Harry S. Truman famously lamented: “Give me a one-handed economist! All my economists say, ‘On the one hand, on the other.’” There certainly are lots of the two-handed variety working at the Fed. In what sense does all this nonsense constitute “forward guidance”?

I was asked yesterday how long before the Fed starts hiking rates might the FOMC drop the “considerable time” phrase. I figure three months. Here is the FOMC’s meeting schedule for next year through the summer, with asterisks marking the meetings with press conferences: January 27-28, March 17-18*, April 28-29, June 16-17*, and July 28-29. Odds are that “considerable time” will be dropped at the March meeting, giving Fed Chair Janet Yellen the opportunity to explain why at her press conference. The first hike might be announced after the June meeting, giving Yellen another opportunity to discuss the committee’s decision.

In this scenario, the question will be whether this would be the beginning of the gradual normalization of monetary policy with small rate hikes in subsequent meetings. It should be, unless the first hike unleashes lots of turmoil in financial markets. That would be the “one and done” alternative scenario.
(Based on an excerpt from YRI Morning Briefing)

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