The U.S. Federal Reserve changed up some of the wording around rate hikes in its most recent Federal Open Market Committee statement (full statement is below).
The statement released today contained some hints “for both hawks and doves in the market,” says CIBC economist Avery Shenfeld. But the Fed also “took pains to say that it didn’t imply a change in view since October.”
“Back then,” notes Shenfeld in a CIBC release, “they pledged a ‘considerable time’ until rates were hiked as QE came to an end.” And “now, they say they will watch the data and expect to be ‘patient’ in beginning to normalize rates.
“But [the Fed] then go[es] on to say that such a policy would still be consistent with having left a considerable period between October and the first [interest rate] hike.”
However, adds Shenfeld, “the 2015 view still calls for getting to a median of 1.13%, which would likely mean a start in rate hikes no later than mid-year. We were calling for a March hike, but will need to see at least a bit firmer wording in January” to be sure that will occur.
Also, he notes, “The Fed didn’t change the language on inflation expectations, but [is] no longer us[ing] the word ‘gradually’ to describe the pace at which labour markets are tightening.”
Full FOMC statement
“Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate.
On balance, a range of labour market indicators suggests underutilization of labour resources continues to diminish.
[Meanwhile], household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.
Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further, [and] survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labour market indicators moving toward levels the Committee judges consistent with its dual mandate.
The Committee sees the risks to the outlook for economic activity and the labour market as nearly balanced. [Further], the Committee expects inflation to rise gradually toward 2% as the labour market improves further, and [as the] transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0% to 0.25% target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress toward its objectives of maximum employment, and 2% inflation.
This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.
Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0% to 0.25% target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.
However, if incoming information indicates faster progress toward [these] 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.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%.
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, chair; William C. Dudley, vice chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.
Voting against the action was Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions.
[Also voting against was:] Narayana Kocherlakota, who believed that the Committee’s decision (in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations) created undue downside risk to the credibility of the 2% inflation target; and Charles I. Plosser, who believed the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, [that the statement] should not emphasize the consistency of the current forward guidance with previous statements.”