FOMC Statement: Some Observations

December 17, 2014

The statement released after the FOMC’s eighth and final meeting of 2014 expressed more optimism in labor market trends, deleting the qualifying adjective “somewhat” from improving labor market conditions and replacing “gradually diminishing” with “continues to diminish” in the comment about underutilization of labor resources.

Sub-target inflation attributed only “partly” to declining energy prices, meaning that other disinflationary forces are in play.  That being said, the second paragraph shifts emphasis away from the likelihood of inflation running persistently below 2% from the view that a rise to 2% will proceed “gradually.”  In both cases, the FOMC has the latitude to be patient in beginning to normalize the stance of monetary policy, which is new language inserted into the forward guidance.

In the forward guidance, moreover, the Fed essentially has its cake and eats it, too.  Markets had been so sure that this would be the meeting that forward guidance language is tweaked that Fed officials risked credibility had they left it the same verbatim.  But the phrase “considerable time” makes one final appearance, because the statement immediately disclaimed that the language modification represented any change in the message of the old language that a 0-0.25% fed funds range is likely to retained for a considerable time after quantitative easing ends. 

The flexibility of the forward guidance is maintained, as policy in the future is to be data driven.  Forward guidance is contingent on an assumed macroeconomic forecast that officials share constantly with the public in the interest of keeping policy highly transparent.  If the assumptions prove wrong, or even if the assumptions mutate somewhat over time, so would the expectations of Fed officials about their own future policy.  In Q&A, Yellen made a related point in stressing that information conveyed are the baseline forecast, whereas market expectations must weight alternative possibilities as well.  So a disparity between market-based forecasts of Fed policy and what the Fed itself offers as the likeliest outcome does not necessarily suggest that the market is misreading the Fed.  Yellen also indicated that Fed officials are not likely to follow the page-book of June 2004 to June 2006, when the fed funds target got raised at 17 straight meetings by 25 basis points each in what was presented at the time as a “measured” pace.  This time, policy at every step of the way will be driven by the flow of economic data and, more importantly, how the totality of data — old as well as new — constantly shapes and perhaps reshapes the view of the FOMC regarding the ever-evolving economic outlook.  Like the academician that she is, Yellen noted that because of the long and variable lags between a change in policy rates and effects on the economy, the cutting edge of what officials decide will be what they expect out of the economy in the future, rather than what is happening contemporaneously.

Yellen was asked if the three dissenting votes suggested an undue lack of consensus among policymakers.  Even without her denial, there was grounds for not taking the dissents too seriously.  All were by presidents, who will be rotated out of voting power in 2015.  Charles Plosser and Richard Fisher are retiring, in fact, from the presidencies of the Philly and Dallas Feds, so soon their hawkish views won’t even be part of the discussion.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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