No major surprises were revealed in the standard summary statement released following the Federal Reserve’s monetary policy setting Federal Open Market Committee (FOMC) meeting January 27-28. With economic output expanding, strong job growth and a declining unemployment rate the committee has shifted its focus to below target (2 percent) inflation as the primary threat to the continuing economic recovery.
The language of the statement is routinely scrutinized by analysts for hints about impending Fed actions. Today’s statement upgraded the recovery modestly, characterizing expanding economic output as at a “solid” pace rather than December’s “moderate” pace, and job gains were “strong” as opposed to “solid.” Demonstrating heightened emphasis on the inflation front, the committee doubled down, laying the blame for below target inflation “largely” on energy prices rather than “partly” in December, and acknowledged that market measures of inflation expectations (i.e., the spread between inflation-indexed Treasury securities and unindexed securities of the same maturity) have declined “substantially” in recent months. In a more soothing tone the committee added that inflation was expected to decline further in the near term before gradually moving back to the 2 percent target.
International developments (presumably the Eurozone and global growth) were added to the list of the wide range of information that would be considered in assessing how long to keep monetary policy so accommodative.
Growing confidence in the recovery, heightened attention to inflation, realistic expectations about the near and medium term developments; these themes set the tone in an effort to manage expectations with regard to the timing of liftoff, the first increase in the federal funds rate. The consensus expectation has been for a mid-2015 increase but calls for both sooner and later can be heard. Calls for an earlier move based on a strengthening economy have been paired with fears that disruptive global events could undermine current progress and patience is required.
The statement also included the by now mantra of the committee: any actions will be data driven. Recent deflation fears will probably keep the proponents of an early move at bay and it’s a little early to argue June is too soon, so for now the consensus is probably the best bet.