Hilsenrath's 712 Words-In-4-Minutes Keeps 'Fed Still Dovish As Ever' Dream Alive
In case you misunderstood and judged the market's reaction to Janet Yellen's first FOMC statement, the ultimate Fed mouthpiece is out with a few clarifying words (well 712 words posted in under 4 minutes). The Wall Street Journal's Jon Hilsenrath clarifies "The Fed stressed it has not changed its plan to keep interest rates low long after the bond-buying program ends," and added further that "the Fed said explicitly for the first time that it likely would keep short-term rates lower than normal, even after inflation and employment return to their longer-run trends." While noting a bigger consensus of members around a 2015 rate 'liftoff', Hilsenrath is careful to point out that the Fed also blamed the weather for not having a clue.
The Federal Reserve on Wednesday altered its guidance on the likely path of interest rates, putting less weight on the unemployment rate as a signpost for when rate increases will start, while affirming its plan to keep borrowing costs low far into the future.
Since late 2012, the Fed had said it wouldn't consider raising interest rates from near zero until the jobless rate fell to 6.5%, provided inflation looks likely to remain below 2.5%. In a new policy statement released Wednesday, the Fed dropped the reference to the 6.5% jobless rate, which officials have come to see as too limited an indicator of the labor market's health.
Instead, the central bank said it would "assess progress…toward its objectives of maximum employment and 2 percent inflation" in deciding when to raise rates from near zero, where they've been since late 2008. In judging that progress, the Fed will "take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments," the statement said.
Moreover, the Fed said explicitly for the first time that it likely would keep short-term rates lower than normal, even after inflation and employment return to their longer-run trends. Its latest projections, also released Wednesday, showed officials coalescing around a 2015 liftoff for interest rates.
Ten of 16 Fed officials said they saw the Fed's benchmark interest rate rising to 1% or more by the end of 2015, a slight uptick in projections from December, when only seven officials saw rates at or above the 1% level. Twelve of 16 officials expected the rate to be at or above 2% by the end of 2016. In December, eight officials saw rates at or above 2% by the end of 2016.
Fed Chairwoman Janet Yellen will likely elaborate on the rate guidance changes at her first press conference as Fed chief, scheduled to begin at 2:30 p.m. Eastern time.
As expected, the Fed also said it would reduce its monthly bond purchases by another $10 billion per month in April, to $55 billion from $65 billion in February and March. The Fed said it would reduce its purchases of long-term Treasury bonds to $30 billion-per-month and cut its purchases of mortgage-backed securities to $25 billion-per-month, a reduction of $5 billion for each. The bond-buying program seeks to push down long-term borrowing rates to spur investing, spending and hiring.
The Fed has been moving toward the change in language about interest rate policy for a few months as the jobless rate fell closer to the 6.5% threshold. The rate was 6.6% in January and 6.7% in February, but Fed officials say they see other reasons to keep rates low, including other signs of slack in the economy and headwinds that are still holding the economy back.
The Fed stressed it has not changed its plan to keep interest rates low long after the bond-buying program ends. Officials continue to believe it is likely they will keep rates near zero "for a considerable time after the asset purchase program ends," especially if inflation continues to run below the Fed's 2% target, the statement said.
Officials explicitly acknowledged that they changed their rate guidance because the unemployment rate had gotten close to the 6.5% threshold. "The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements," officials said.
In their statement, Fed officials acknowledged the recent string of soft economic data, saying that "economic activity slowed during the winter months, in part reflecting adverse weather conditions."
Eight of the nine voting members of the policy-making committee supported the changes to the rate guidance and bond-buying program. Minneapolis Fed President Narayana Kocherlakota dissented, objecting to removal of the quantitative unemployment and inflation thresholds from the Fed's guidance on interest rates.
Normally, all seven Fed governors vote at every policy meeting, as does the president of the Federal Reserve Bank of New York. But the Fed board of governors currently has three vacancies.
The presidents of the 12 regional Fed banks vote on a rotating basis. This year, Cleveland Fed President Sandra Pianalto, Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser and Mr. Kocherlakota of Minneapolis vote.
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