A More Hawkish FOMC Statement than Some Were Expecting

January 27, 2016

The January FOMC statement is neither all hawkish nor noticeably more dovish than the one released six weeks ago when the first federal funds rate hike since June 2006 was made.  Considering the disappointing economic data and wildly tumultuous financial and commodity market movement during the interim, the surprise is that the statement still implies more rate hikes than the marketplace is discountingIt will take something other than this statement to restore market calm in a constructive and lasting way.

For some time, including the December statement, the FOMC has been asserting that the economy is and will continue to expand at a moderate pace.  This new statement concedes that growth slowed late in 2015 but quickly adds that such didn’t impede further diminishing underutilization of labor resources. From the standpoint of its growth mandate, nothing has changed.  And the statement goes on to predict that future growth will be “moderate” once again and that labor markets will continue to strengthen.  Some other claims in this new statement are as follows.

  • The recent pace of household spending and business fixed investment was relabeled “moderate” from December’s characterization of “solid.”
  • The housing sector continues to be called “improving,” and net exports are called “soft” once again.
  • A reference to slower inventory investment has been added to the text. 
  • Remarks about the actual rate of inflation are the same as before.
  • Lower prices for energy and non-energy imports are again identified as two factors prolonging the return of inflation to the 2% target, but there is no protest against the stronger dollar, which is the reason for falling import prices.
  • Officials have stuck to their story that falling prices for energy and non-energy imports are transitory factors.  Without explicitly saying so, this implies that the cost of oil and the dollar will stabilize soon.  That’s a debatable point.
  • Assuming they do stabilize and because of diminishing underutilization of labor, actual inflation is projected to rise to the 2% target over the medium term.  So progress toward both mandates has not been compromised.
  • The timing and size of future hikes in the federal funds target will be data-driven, and the statement repeats a wide list of indicators that will be impact future decisions, along with developments in foreign economies and global financial markets.

Nothing in the new statement, which was unanimously approved by FOMC members, suggests that the committee’s average thinking regarding how much rate tightening is likely to be done during 2016 is any less than the four moves of 25 basis points each that was signaled six weeks ago.  This doesn’t necessarily mean that the number of preferred rate hikes this year might have been scaled back if individual views on the FOMC had been polled as was done in December and will be done at the next meeting in mid-March. What we only know for sure is that 1) officials are probably unsure how the flow of pertinent information will evolve in the period ahead and 2) that they felt that their long-term credibility with the public and markets would be better served by leaving December’s message largely intact at this juncture than by appearing to close down options that they may wish to pursue.  Doing the latter could open themselves up to the accusation of flip-flopping from a hawkish message in December to a more dovish one in January and then going back to the hawkish view in March.  They want to retain maximum flexibility. 

The danger of this strategy is that December’s message had been associated with growth-dampening financial market developments in the interim.  This may be just a correlation.  Or, such may signal causation.  In either case, the FOMC has taken no step here to calm nervous markets.  All things being the same, continuing market volatility seems more likely than had the Fed gone out of its way to acknowledge concern about what’s been happening and to provide reassurance that with inflation persistently lower than the path officials have for some time been assuming, that they are prepared to do whatever it takes to ensure in a preventive way that market volatility doesn’t infect the U.S. and world real economies, aggravating currency wars and generating lowflation and recessionary conditions.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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