Updated: 01-29-2015The Federal Open Market Committee (FOMC) started 2015 with neither a bang nor a whimper. It was more like a resolute sigh.

Its latest directive began with an emphasis on the improvement in the U.S. economy, noting that information received since it last met in December suggests economic activity has been expanding at a solid pace. At the December meeting, it noted economic activity is expanding at a moderate pace.

The latest directive also stretched to point out that household purchasing power has been boosted by recent declines in energy prices. There wasn't any acknowledgment of improved purchasing power in the prior directive even though oil prices had declined roughly 50% from their June highs at the time of the December FOMC meeting.

The strongest statement, though, about the goings-on in the U.S. economy was perhaps embedded in what the FOMC didn't say. To that end, there was no mention of global developments currently having any impact on the U.S. economy.

To be fair, "international developments" was added to the wide range of information the FOMC will look at regarding its assessment of how it is progressing toward meeting its objectives of maximum employment and 2 percent inflation. The December directive did not include that language on "international developments."

The absence of any mention of what is currently going on abroad implies to us that the FOMC is not overly concerned about a spillover effect to the U.S. economy; accordingly, we suspect its tacit aim is to keep the market vested in the possibility (but not the guarantee) that a hike in the fed funds rate could still take place in mid-2015.

For that matter, it could happen sooner. We say that only because the directive reiterated the FOMC's position that increases in the fed funds rate could occur sooner than now anticipated if incoming information indicates faster progress toward meeting its dual mandate than the Committee now expects. They could come later, too, if that progress proves slower than expected.

As of now, the FOMC thinks the underutilization of labor resources continues to diminish, yet it acknowledges that market-based measures of inflation compensation have declined substantially in recent months. The FOMC thinks that inflation over the medium term will rise gradually toward 2 percent as the labor market improves and the transitory effects of lower energy prices and other factors dissipate.

The latest directive has dropped the "considerable time" language and has been streamlined to acknowledge the FOMC's judgment that it can be patient in beginning to normalize the stance of monetary policy.

The Fed of course left the 0 to percent target range for the fed funds rate unchanged. The vote for the monetary policy action was unanimous.

What wasn't unanimous was the response of the capital markets to the latest Fed directive. Treasuries rallied, stocks sold off sharply, and the U.S. Dollar Index advanced after the FOMC decision.

That was deemed by some to mean the Fed's directive wasn't clear cut, having offered a little something for both the hawks (economic activity expanding at a solid pace and improved household purchasing power) and the doves (substantial decline in market-based measures of inflation compensation and concession that international developments will factor into its policy assessment).

In the end, the disparate reactions point to confusion in the market. That's not what anyone wants to see. It breeds increased volatility, which has been a featured happening so far in 2015 due, among other things, to the suspect policies of central banks around the globe.

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