Federal Open Market Committee – Patience and Inflation

The Federal Reserve’s monetary policy setting Federal Open Market Committee (FOMC) concluded its December meeting releasing a standard summary statement and Chairwoman Janet Yellen presided over a post-meeting press conference.

With the asset purchase program a thing of the past as of October the all-consuming question among Fed watchers now is when to expect “liftoff”, the first increase in the federal funds rate, the Fed’s main tool for steering short term interest rates and managing economic growth.

The two main themes in both the statement and Yellen’s press conference were patience and inflation. A recurring sub-theme was that actions would be data driven. Language in the statement was expanded to emphasize that inflation running below the target 2 percent was of concern but believed to be transitory, driven mainly by declining oil prices in the near term. Accelerating job gains and economic growth should bring inflation up to the target level gradually and the committee would be patient, carefully monitoring incoming economic data in its decision making process.

At her press conference Yellen went to great lengths to explain that the inevitably scrutinized new language in the statement reflected no change in policy but rather an effort to clearly communicate the pace of monetary policy normalization. Cumulative gains in economic conditions most likely will warrant increasing the funds rate sometime in 2015 but how soon depends entirely on evolving economic conditions.

A consensus had formed around liftoff mid-year but some analysts have pointed to the declines in the unemployment rate as justifying an earlier start. Yellen stated that current assessments of the economy most likely took the next two meetings (January and March) off the table but quickly retreated to the caveat of faster or slower progress toward the dual mandate of full employment and 2 percent inflation could lead to an earlier or later liftoff.

As to the pace of increases after liftoff Yellen strongly discouraged the assumption that increases would follow a script of 25 basis points per FOMC meeting, again insisting that the process of raising the federal funds rate to its longer run normal level would be data driven, not calendar based. With that preamble Yellen went on to note that the median expectation among FOMC meeting participants was for a federal funds rate below its normal level until the end of 2017.

Overall the message from the meeting is that the Fed is confident that the economy is improving but below target inflation will be closely monitored, and highly accommodative monetary policy isn’t going away anytime soon.

 



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