FOMC Statement

January 28, 2015

The January 27-28 monetary policy statement from the Federal Open Market Committee carried no dissents, unlike the previous statement in which R. Fisher, Plosser and Kocherlakota each had some sort of disagreement with the majority.  The statement upgrades the pace of the economic expansion to solid, observes a further decline in labor market underutilization, predicts inflation will go even lower in the near term, and comments that short-term market-based measures of expected inflation have diminished.  The process leading up to the beginning of interest rate normalization can be “patient,” the buzzword introduced in the prior December 17 statement, but that modification of forward guidance language is no longer explicitly portrayed as fully consistent with the prior language of keeping a 0-0.25% target for a likely “considerable time.”  A potentially key additional thought in this statement, but not previous ones, involves the bolded words in the following sentence from the paragraph dealing with forward policy guidance and specifically what factors will influence the timing of the first rate hike:  “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”   Yesterday’s sharp decline in U.S. share prices appeared tied to mounting evidence of corporate difficulty dealing with the appreciating dollar.  When the external value of the dollar appreciates, a de facto tightening of U.S. monetary conditions occurs.  The rule of thumb used to be that a 10% trade-weighted dollar rise had the same economic effect as a one percentage point increase of the federal funds rate.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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