FOMC Review

September 17, 2015

The FOMC decided that the 0-0.25% federal funds target remains appropriate and did not change its policy stance in any other way.  The last two scheduled opportunities in 2015 for interest rate liftoff are October 28 and December 16.  Thirteen of the seventeen committee members believe liftoff at one of those meetings will probably be appropriate, which is two fewer than thought so at the June 28-29 meeting.

The FOMC statement and Chair Yellen gave the following reasons for why the Committee didn’t raise the rate target today.

  • Market-based measures of inflation compensation moved lower since the prior meeting in late July.  This possibly but not definitely indicates downward movement in near-term expected inflation.  Committee members want to monitor this development further.
  • Before acting, it’s not enough to expect that inflation will move back to its 2% medium-term objective; committee members need to be “reasonably confident” that such will happen. 
  • Recent renewed declines in energy prices and in prices of non-energy imports (due to a rising dollar) create some new doubt in the confidence of hitting the inflation goal.  While these factors are considered likely to prove transitory, the group’s median and average inflation projections for PCE and core PCE price deflators were revised marginally lower for both 2016 and 2017 from estimates made in June.  The June forecast of core PCE, by contrast, had been revised upward from ones formulated last March.
  • Labor market conditions continue to improve and are quite healthy in some but not all respects.  The labor participation rate appears still too low, and the difference between the 5.1% jobless rate and the considerably higher 10.3% alternative measure that also includes various elements of under-employment suggest that there is more residual slack in the labor market than generally realized.  Further improvement in the labor market will convince officials that the effects of lower inflation caused by transitory factors like the higher dollar and fall in oil prices will not impede eventual rise of inflation to the 2% objective.
  • The most telling sentence in the statement reads, “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”  Officials felt they needed more time to review this situation.  Of most interest, it’s not just China that concerns them but a whole range of emerging markets and the uncertain impact that such may exert on U.S. growth.
  • Median and average projected U.S. growth rates in 2016 and 2017 were also revised marginally lower.

There were some awkward discussions.  Yellen said uncertainty will never be eliminated entirely and described a process that considers a very wide range of factors but ultimately appears to be highly subjective in defining the line between uncertainty that is manageable and allow officials to start rate normalization and uncertainty that compels the group to delay action.  This tradeoff doesn’t just involve the first increase.  Indeed, Yellen again stressed that the overall path of normalization in much more significant than the timing of the first move.

For another thing, unemployment has fallen much more quickly and extensively than Fed officials had imagined it would, and the speed of decline continues to confound the group.  However, the new projections show the projected jobless rate abruptly leveling off just below the current level and averaging 4.8% in 2016, 2017 and even 2018.  That depiction appears to lack credibility.  Third, Yellen denied that uncertainty regarding Fed policy was itself a major source of financial market volatility last month.

As laid out in my earlier posting that asked if the Fed should raise or hold, I think the committee made the right collective decision.  Conditions, while improved, to not fit the profile of those existing when the previous four tightening cycles were begun.  The decision, however, was not a unanimous one.  Richmond Fed President Lacker dissented in favor of a rate hike of 25 basis points, and at least one member — probably Kocherlakota of Minneapolis or perhaps Rosengren of Boston — thinks that dropping the fed funds rate to marginally negative territory in 2016 of -0.25-0.0%) would be appropriate.  The disparity of views runs a whole spectrum that one sees in the dot-plot handout, so it’s important to recognize that Committee decisions today and at future meetings will to some extent hinge on the tempo of discussion — whoever communicates their opinions most persuasively will exert influence on others and affect how a consensus is reached.

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



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