Via JPMorgan's Mike Feroli,
A quick Fed update
The recent increase in financial market volatility has raised some questions about any rhetorical response from the FOMC tomorrow. While we see some risk of this occurring, we think the most likely outcome is that the Committee refrains from highlighting the latest flare-up in the markets.
In particular, we think they will still drop the 'considerable time' language while also indicating they are in no rush to raise rates.
For a historical guide to the Fed's thinking, we don't have to go too far back; the minutes to the October 2014 meeting -- which occurred shortly after a jump in market stress -- laid out how they viewed the appropriate rhetorical response. The minutes read:
"members considered the advantages and disadvantages of adding language to the statement to acknowledge recent developments in financial markets. On the one hand, including a reference would show that the Committee was monitoring financial developments while also providing an opportunity to note that financial conditions remained highly supportive of growth. On the other hand, including a reference risked the possibility of suggesting greater concern on the part of the Committee than was actually the case, perhaps leading to the misimpression that monetary policy was likely to respond to increases in volatility. In the end, the Committee decided not to include such a reference."
Of course, if the recent move in asset prices does imply "greater concern on the part of the Committee," then the October comparison is inappropriate. Our best guess, however, is that their concerns have not materially increased. The ruble doesn't matter for the US economy. Lower oil prices and interest rates are good things. The most obvious bad thing is the widening in high-yield credit spreads. But note that in the most recent discussion of financial stability risks in the Monetary Policy Report, the Fed highlighted narrowing credit spreads as a sign of heightened risk-taking -- a concern which was echoed in the staff's latest assessment of financial stability risks in the October minutes. We think it would be odd for the Fed to pivot from repeatedly warning of excessive risk-taking in corporate credit markets to warning about excessive risk aversion in those same markets. Thus we don't think this will merit a mention in the statement.
