Comments on FOMC Press Conference

September 17, 2014

Three documents were released.

  • The FOMC statement was notable for two things.  Policy guidance was not changed, and there were two dissenters (Richard Fisher as well as Charles Plosser).  The FOMC majority continued the assertion that it “likely will be appropriate to maintain the current target range for the federal funs rate for a considerable time after the asset purchase program ends.”  Estimates of the likely earliest time of a rate hike of March-April is still six months after the end of QE3, and that can be argued to be considerable.  Plosser was trained academically at U. Chicago, where monetarism is akin to religion.  Given the size of the Fed balance sheet, it would be surprising if he weren’t inclined to start normalization sooner.  Richard Fisher is President of the Dallas Fed, representing a region of the country where growth is faster than the national average and where unemployment is below the nation’s mean.
  • A statement on rate normalization lays out some modest changes in this area.  None of this will be operative for a couple of more quarters.  One area of interest is that the fed funds rate will be the operative target, and that target will continue to be stipulated as a range, not a point.
  • New forecasts updated those in previously made in June.  Revisions were modest.  Growth in 2015 was revised lower, but so was the unemployment range.  Inflation doesn’t get to 2.0% until late 2016 or 2017, which has been added to the forecast period.  By end-2017, all but two FOMC members believe the fed funds rate to be at least 3.0%, but just three members expect such to exceed 4.0%.  The long-term normal funds rate is considered to be around 3.75%, which is lower than it was prior to the Great Recession.

The press conference seemed wonkier than usual, dealing with many hypothetical events well into the future.  A data-driven policy is really a simpler concept than the reporters wanted to treat it.  Future data are not known, but FOMC members hold views on the likeliest data outcomes.  Members of course don’t agree, and they will adjust views as facts change.  In giving rate guidance, the FOMC is merely articulating what would happen if the average of member expectations actually happened, but that of course has less than a 50% chance given the huge uncertainty involved and the diversity of opinion so far in advance.  Reporters should be concentrating on seeing how the FOMC’s expected policy path correlates with changes in its expected underlying fundamentals.  The actual forecasts of the FOMC at any given point in time are less meaningful.  Investors need to assess the Fed’s reaction function, plug that into their own proprietary forecast of future economic trends and ignore what the Fed officials are projecting about the interest rate path.

It’s a shame that the external value of the dollar doesn’t play a greater role in Fed policy formulation or in the framework of these press conferences.

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



Comments are closed.