The Federal Reserve’s monetary policy setting committee, the Federal Open Market Committee (FOMC), concluded its September meeting announcing no increase in the federal funds rate. Global economic and financial uncertainty was the reason to wait.
Federal Reserve Chair Janet Yellen explained the decision in her post-meeting press conference. The domestic economic recovery is shaping up nicely. Economic and payroll employment growth have strengthened, but renewed declines in energy prices and strengthening of the dollar against other currencies have added to downward pressure on inflation. This clouds the near term outlook for inflation but won’t change the outlook for the medium term. The real concern is a slowing Chinese economy (as well as other emerging market economies) and the spillover effects that could have on trading partners (including the US) and financial markets.
While the policy normalization process didn’t begin with this meeting, absent any major setback, liftoff is highly likely before the end of the year. The economic projection materials, and Yellen in her comments, indicated that thirteen of seventeen FOMC members still anticipate the first rate increase before the end of the year. The “dot plots” show seven of those members expect a 25 basis point increase by year-end, five expect a 50 point increase, and one 75 point increase. Analysts expect increases in 25 basis point increments, so 25 and 50 point movements suggest increases at one and both remaining meetings, respectively. A 75 point increase suggests three increases. The views of individual members are not identified but Jeffrey Lacker, president of the Richmond Federal Reserve Bank and the sole dissenter to today’s policy action, is the logical candidate for the 75 point increase. He preferred to raise the federal funds rate 25 basis points at this meeting.
In response to a question, Yellen repeated the assertion that an increase in the funds rate could happen following any meeting (October and/or December), not just those meetings followed by a press conference (December). But given the emphasis on clear communication of Fed actions and intentions the odds are stacked in favor of press conference meetings. And Yellen’s insistence that the path of subsequent increases will be more important than the timing of the first move notwithstanding, analysts will remain focused on precisely that. And for now, the timing of liftoff just feels like December.