Fed: Way Station to March

Published on January 28, 2015

There is not much to add to the release of the Federal Open Market Committee statement this afternoon, which came out almost exactly as we noted was likely in our report earlier today (SGH 1/28/15, “Fed: January Expectations”); but briefly, a few takeaways:

The descriptive first paragraph affirmed economic activity is expanding at a solid pace, the drop in oil prices is boosting consumer spending, and the Committee made a point to acknowledge the market pricing for inflation compensation has declined substantially, but they again framed it against the weightier real economy survey-based inflation expectations.

The FOMC can be patient in removing monetary accommodation, which still keeps June as a live option, albeit one that might be a bit hard to pull off.

The FOMC also said they will be watching financial “and international developments,” but before the market gets its knickers in a twist interpreting that as overly dovish, it is in fact fairly neutral; it could just as easily mean, for instance, that they are taking the European Central Bank’s recent QE as a potential net stimulus that could even be a hawkish indication over the medium term.

And in fact on that medium term point, probably the most important bit of the statement was the inflation treatment in the second paragraph, that the Committee expected the inflation measures to decline further in the near term, but that they still believe it will rise towards the 2% mandate consistent level in the medium term , where of course monetary policy operates with its lags. We will see whether there will be any noteworthy changes in the inflation sentences of the annual “Longer Run Goals and Monetary Policy Strategy” that will be released in the Minutes, but we kind of doubt there will be.

Indeed, as we observed in our earlier report, today’s statement was going to be something of an October-like way station to the more important upcoming meeting – March in this case. The really interesting takeaways are much more likely in the Minutes published February 18 rather than anything that was put into the statement today.

If the upcoming Fed speakers go a little more vague about June for the timing to a rates lift-off, and dial back to the “mid-2015” rhetoric, we think it would confirm that the burden of proof inside the Committee is swinging hard against those making the case to keep June truly an option; it would take a pretty impressive pick-up in jobs and growth or a whiff of core inflation or wages turning up – by March no less – to truly keep that a credible option.

But along the same lines, barring an unexpected slowing or southern turn in the real economy relative to the central tendency forecast, FOMC speakers are likely in the coming weeks to just as fiercely push back on any notions of the lift-off being delayed beyond September, and rhetorically to bring the market at least a little closer to the Fed’s own rate path expectations.

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