FOMC Statement Review

October 29, 2014

The FOMC statement upgrades the assessment of labor market conditions, calling employment growth solid and unemployment lower, and terminates QE3.  Moreover, the statement does not cite slower global growth, and it says the likelihood of inflation persistently below 2% has diminished somewhat.  The language of forward interest rate guidance was not changed, however, anticipating no immediate increase and indicating that rate normalization will proceed gradually and involve a lower rate path that one would imagine based on historical patterns.  Although the statement thus contains elements supporting a more hawkish majority on the FOMC but also elements that policy has not changed much, a telling shift corroborates the first interpretation that policymakers might tighten sooner rather than later.  This refers to dissenting votes.  Before, the hawks, Plosser and R. Fisher, had dissented.  No it is the most dovish member, Kocherlakota, who has dissented.   Final thought is that the most important question to answer is not whether the Fed is more likely to begin tightening in March, June or September of 2015, nor how quickly member now anticipate that rate normalization will be done.  The key question — how well the U.S. economy will handle rising short-term and long term interest rates, supplemented by an appreciating dollar — is not addressed in today’s statement.  The fact is that nobody can answer that, and much will hinge on whether fiscal policy provides some offsetting boost to growth.  When Fed officials say that future policy will be data-dependent, they acknowledge the paramount importance of the U.S. economy’s tolerance for less accommodative monetary conditions.

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



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