Updated: 12-17-2014The latest policy directive from the Federal Open Market Committee (FOMC) was something. It basically entered the phrase "considerable time" in the witness protection program, noting that its new perspective that it can be "patient" in beginning to normalize the stance of monetary policy should be seen as consistent with its previous statement that it likely will be appropriate to maintain the 0 to percent target range for the federal funds rate for a considerable time.  

The wording throughout the rest of the directive was largely the same as the October directive, although we are left with the impression that the FOMC is a bit more concerned with inflation trends than it was in October.

To the latter point, the December directive indicates that inflation has continued to run below the FOMC's longer-run objective, partly reflecting declines in energy prices (bolded text is our own and reflects new language). Furthermore, it was stated that market-based measures of inflation compensation have declined somewhat further (in October it was said only that they had declined somewhat).

In her press conference, Fed Chair Yellen said it is unlikely the FOMC will begin the normalization process for the next couple of meetings and that, if inflation continues to run below the 2% inflation rate goal, it could hold rates lower for a considerable amount of time. These views were presented with the caveat that the Fed is data dependent and that the data will be central to the normalization process.

Notably, the Fed's central tendency projections for 2015 show no change in its real GDP outlook (2.6% to 3.0%) but a downward adjustment to PCE inflation views (to 1.0 to 1.6 from 1.6 to 1.9).  The central tendency projection for Core PCE was also lowered (to 1.5 to 1.8 from 1.6 to 1.9).

Fed Economic Projections (central tendencies as of December 2014)
  2014 2015 2016 2017 Long Run
Change in real GDP 2.3 to 2.4 2.6 to 3.0 2.5 to 3.0 2.3 to 2.5 2.0 to 2.3
September projection 2.0 to 2.2 2.6 to 3.0 2.6 to 2.9 2.3 to 2.5 2.0 to 2.3
Unemployment rate 5.8 5.2 to 5.3 5.0 to 5.2  4.9 to 5.35.2 to 5.5
September projection 5.9 to 6.0 5.4 to 5.6 5.1 to 5.4 4.9 to 5.3 5.2 to 5.5
PCE inflation 1.2 to 1.3 1.0 to 1.6 1.7 to 2.0 1.8 to 2.0 2.0
September projection 1.5 to 1.7 1.6 to 1.9 1.7 to 2.0 1.9 to 2.0 2.0
Core PCE inflation 1.5 to 1.6 1.5 to 1.8 1.7 to 2.0 1.8 to 2.0 NA
September projection 1.5 to 1.6 1.6 to 1.9 1.8 to 2.0 1.9 to 2.0 NA

Everything else in the directive was pretty identical to the one before. One glaring exception, though, is that there were three dissents at this meeting versus only one at the October meeting.
  • Dallas Fed President Fisher, a noted hawk, dissented on the belief that U.S. economic performance since October has moved forward since October, more than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate. 
  • Philadelphia Fed President Plosser, another noted hawk, dissented on the grounds that the statement should not stress the importance of the passage of time as a key element of its forward guidance and that it should not emphasize the consistency of the current forward guidance with previous statements given the improvement in economic conditions. 
  • Minneapolis Fed President Kocherlakota, a noted dove, thought the Committee's decision created undue downside risk to the credibility of the 2 percent inflation target. 
On balance, the latest communication from the FOMC can be regarded as dovish or, in the spirit of the latest directive, it can be seen as consistent with the previous belief that the FOMC sounds like one of those little white birds with a gentle disposition.

The prevailing dovish elements from the latest FOMC meeting include the following:
  • The added acknowledgment that inflation running below the longer-run objective only partly reflects declines in energy prices
  • The Fed Chair's admission that the policy normalization process is unlikely to begin for the next couple of meetings; and 
  • The understanding that Dallas Fed President Fisher and Philadelphia Fed President Plosser (both of whom will be retiring) are not voting FOMC members in 2015. In their place will be a body of Fed presidents -- Lockhart (Atlanta), Evans (Chicago), Lacker (Richmond), and Williams (San Francisco) -- with more dovish to centrist dispositions that suggest a greater willingness to be more patient in beginning to normalize policy

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