Updated: 09-19-2014The waiting is over and the guessing is over.  The Federal Open Market Committee maintained the "considerable time" verbiage in the directive from the September 16-17 FOMC meeting.

Actually, the directive maintained a lot of what was said in prior directives.  In that vein, it can be described as a dovish statement even though it garnered two dissenting votes from Dallas Fed President Fisher and Philadelphia Fed President Plosser.

Contextually, the directive revealed that the FOMC isn't satisfied yet with its performance in meeting its dual mandate even though it judged that there is sufficient underlying economic strength in the broader economy to foster maximum employment and price stability.

If it was satisfied, then the fed funds rate certainly wouldn't be at the zero bound and the directive wouldn't be bemoaning that "...a range of labor market indicators suggests that there remains significant underutilization of resources," and that, "...Inflation has been running below the Committee's longer-run objective.

As expected, the FOMC announced a further tapering of its asset purchases, saying it will now buy $5 billion of mortgage-backed securities per month rather than $10 billion per month, and $10 billion per month of longer-dated Treasury securities rather than $15 billion per month.

It is the Fed's belief that its current program of asset purchases will end at its next meeting (Oct. 28-29) if incoming information continues to support ongoing improvement in labor market conditions and inflation moving back toward the Fed's longer-run objective of 2.0%.

In conjunction with the directive, the Fed released updated central tendency economic projections through 2017.  Strikingly, it lowered its real GDP growth view for 2014 and 2015, and PCE inflation isn't projected to hit its longer run target until 2016 - and that's only at the high end of the central tendency projection for 2016.

The unemployment rate projections, however, were improved slightly for the 2014-2016 period.   Fed Chair Yellen suggested the latter was a contributing factor to why more members at the September meeting (14) moved up their projection for the timing of the first hike in the federal funds rate in 2015 versus the June meeting (12).

Fed Economic Projections (central tendencies as of  September 2014)
  2014 2015 2016 2017 Longer Run
Change in real GDP 2.0 to 2.2 2.6 to 3.0 2.6 to 2.9 2.3 to 2.5 2.5 to 2.8
June projection 2.1 to 2.3 3.0 to 3.2 2.5 to 3.0 na 2.1 to 2.3
Unemployment rate 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
June projection 6.0 to 6.1 5.4 to 5.7 5.1 to 5.5  na5.2 to 5.5
PCE inflation 1.5 to 1.7 1.6 to 1.9 1.7 to 2.0 1.9 to 2.0 2.0
June projection 1.5 to 1.7 1.5 to 2.0 1.6 to 2.0 na 2.0
Core PCE inflation 1.5 to 1.6 1.6 to 1.9 1.8 to 2.0 1.9 to 2.0 na
June projection 1.5 to 1.6 1.6 to 2.0 1.7 to 2.0  nana
Source: Federal Reserve

The projections seen in the table above don't exactly convey an expectation for a strong pickup in growth anytime soon.  That, in turn, suggests the fed funds rate will remain at an extraordinarily low level for some time.  It may not stay stuck at the zero bound, yet there is going to have to be a sustainable string of stronger than expected data to convince the market that the Fed is going to raise rates faster and considerably more than expected.

Be that as it may, the FOMC made a point of publishing an outline for how it expects to go about normalizing the stance of policy when the time comes to do so.

In her press conference, Fed Chair Yellen noted that the FOMC will be using a target range for the fed funds rate, rather than a single point, during the normalization process and that it will move the federal funds target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserves.

All but one of the FOMC members agreed on the key elements for normalization.

As noted above, all but two FOMC voters (which Fed Chair Yellen doesn't see as an abnormally large number) agreed with the latest monetary policy action.
  • Dallas Fed President Fisher's objection was tied to his belief that a variety of factors, including continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than suggested by the Committee's forward guidance.
  • Philadelphia Fed President Plosser objected to the inclusion of the "considerable time" language, because he views it as time dependent and not reflective of the considerable economic progress made toward the Committee's goals.
While the Fed's latest directive is much of the same that has been heard for a considerable time now, it is a stretch to say that it was a non-event.  It can't be given the Fed's influence on the behavior of the capital markets.

The Fed Chair made an effort to impress upon listeners that the data could change in a way that would force the Fed to raise rates faster, and more, than is now expected by the market.  However, there still weren't any red messaging flags in the directive that would scare the market into believing that the the fed funds rate will be increased sooner rather than later.

In sum, the FOMC is taking the path of least resistance by staying on the same policy path.

--Patrick J. O'Hare, Briefing.com

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