Fed Keeps Considerable Time But Ups Rate Expectations Through 2017
- The Fed kept its statement largely intact relative to July’s; opting to retain the much-ballyhooed “considerable time” phrase.
- It was confirmed that QE’s tapering would be concluded by the end of October; while the Fed’s rate expectations were increased.
- Yellen took great pains to explain that “considerable time” should not be considered calendar-based guidance.
The Federal Open Market Committee (FOMC) made few substantive changes to its statement accompanying their two-day meeting that concluded this afternoon. After a well-publicized report yesterday from The Wall Street Journal’s Jon Hilsenrath in which he opined that the Fed would not likely drop the “considerable time” phrase from their statement, that expectation had likely gotten baked into expectations. Jon is considered a “mouthpiece” of sorts for the Fed, although there is no formal confirmation of that.
Obsession over “considerable time”
The sentence that was not altered, but was obsessively analyzed by investors and the press, reads as follows: “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, 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.”
The decision to keep the language intact was likely due to the Fed’s ongoing concerns pertaining to the “significant underutilization” of labor resources; and the recent retrenchment in inflation. The FOMC noted that “inflation has been running below the committee’s longer-run objective;” while in July, the statement read that inflation was “somewhat closer” to its goal.
In addition, Fed Chair Janet Yellen made it clear during today’s press conference that “considerable time” does not have a “fixed mechanical interpretation;” but that the Fed will truly be “data dependent,” not “calendar-based,” and is “highly conditional and linked to the Committee’s assessment of the economy.”
QE winds down
The Fed also did not surprise on the quantitative easing (QE) tapering front: “Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month.” The FOMC confirmed its asset purchases would be fully wound down in October.
The Fed also released their "Policy Normalization Principles and Plans", thought of as their “exit strategy.” To summarize, “some aspects of the eventual normalization process will likely differ from those specified earlier;” specifically, the first move will be a rate hike, not passive balance sheet shrinkage. More details can be found in the linked release above.
Voting against the action were Richard W. Fisher (Dallas Fed President) and Charles J. Plosser (Philadelphia Fed President). Fisher, a new dissenter, believes that “the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance.” Plosser dissented for the same reason as he did in July; objecting to the aforementioned “considerable time” language.
Fed’s estimates rise; markets to follow?
The Fed noted that the economy is expanding at a moderate pace while inflation remains below its threshold. But they did raise their median estimate for the federal funds rate at the end of 2015 from 1.125% (as of June) to 1.375% (as of September). The median estimate for the end of 2016 is now 2.9%, up from 2.5%; and they believe the rate will be 3.75% by the end of 2017; the first time they’ve published a 2017 estimate.
Heading into today’s meeting, the fed funds futures market showed that investors have a more benign set of expectations for the future path of interest rates. If economic growth remains relatively healthy and job growth persists at a reasonable pace, it’s expected that gap between the Fed’s and the market’s expectations would likely narrow by the latter moving higher.