Just hours ago, we asked [10] if the Fed's unofficial media mouthpiece had leaked the Fed decision when a WSJ colleague took to Twitter and, quoting Jon Hilsenrath, said the following: "For Yellen, who likes to arrive three hours early for a flight, raising rates without preparing markets would be out of character." To wit:
So did Hilsenrath just "prepare" markets with a two hour advance notice of what to expect? Or did he simply add to the Fed's communication failure by "hinting" the market to expect one thing, while Yellen will unveil the opposite? Not even Gartman has the answer to that.
Well as it turns out, the FOMC has elected to stand pat in the face of mounting global risks and rising volatility. Employing his hallmark lightspeed, embargo-assisted copy editing skills, the Fed whisperer churned out the following bit of crisply-worded analysis for anyone having trouble interpreting the FOMC statement.
Via WSJ [11]:
The Federal Reserve left short-term interest rates unchanged after weeks of market-churning debate at the central bank about whether it was time to end an era of near-zero rates in acknowledgment of the stronger domestic U.S. economy and job market.
A large majority of Fed officials still believe the central bank will raise rates before year-end, but the central bank showed a bit less conviction on that point. In June, 15 of 17 officials said they expected to raise rates this year, according to official projections released with the Fed’s policy statement; on Thursday the number of people who expected to raise rates this year slipped to 13.
The Fed also indicated in its policy statement trepidations about recent turbulence in financial markets and in economies abroad. “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term,” the Fed said. It added that it was “monitoring developments abroad,” a signal of the Fed’s heightened state of worry that slow growth outside the U.S. could hurt the American economy.
The fact most officials still believe they will move rates up this year suggests many believe these concerns will subside in the weeks ahead.
Fed officials have been signaling for months they plan to raise rates this year, seven years after pushing them to exceptionally low levels in December 2008 in response to financial crisis. Central to their optimism is a view labor markets are improving rapidly and reducing slack in the economy, a precursor to some lift in inflation. Unemployment was 5.1% in August, in the range officials expect to see over the long term. Inflation has been running below 2% for more than three years.
“On balance, labor market indicators show that underutilization of labor resources has diminished since early this year,” the Fed said.
As recently as July, Fed officials appeared to be on track to move at this week’s policy meeting, but a variety of factors gave them pause, including a stronger dollar, stock- and bond-market volatility and signs of a slowdown in China, the world’s second-largest economy.
They are now on watch to make sure these threats don’t turn into a bigger problem for the U.S. economy. A strong dollar, for instance, could put downward pressure on exports and imported inflation, movements at odds with the Fed efforts to spur economic growth and raise currently-low inflation.
They appear to expect—somewhat more tentatively than before—that they will proceed with rate increases once they get evidence these developments won’t fundamentally shift the economic outlook.
The Fed said, as it has before, it would raise rates when it saw “some further improvement” in labor markets and when officials become “reasonably confident” that inflation will rise toward 2% in the medium term.
Before the meeting, investors had come to believe the Fed wouldn’t move. In futures markets before the meeting, traders attached a 27% probability to a rate increase Thursday, but a 64% probability to an increase by December.
Though Fed officials still expect to move rates up this year, their projected path of rates has become shallower in recent months. The median projection for rates at the end of 2015 dropped to 0.375% from 0.625% in June. It also dropped to 1.375% at the end of 2016 from 1.625% projected in June. It fell to 2.625% at the end of 2017 from 2.875% projected in June. In the long-run the Fed projected the fed funds rate will reach 3.5%, down from an earlier estimate of 3.75%.
One official called for a negative interest rate in 2015 and 2016, something that has been tried in several European countries to boost growth and inflation. The Fed doesn’t identify which officials make specific projections.
One reason for the shifting outlook: Officials have become a bit less optimistic about the economy’s long-run growth potential. They projected the economy will grow at a rate between 1.8% and 2.2% in the long-run, down from their June estimate of growth of 2.0% to 2.3% in the long-run. A more lumbering economy has less capacity to bear much higher rates.
The Fed’s economic projections underscored the challenge officials face in reading the current economic backdrop. Fed officials reduced their estimates for the path of the unemployment rate. They see it reaching 5.0% by year end and 4.8% by the end of next year, a lower rate than previous estimates of 5.3% and 5.1% respectively.
Textbooks suggest that as estimates for the jobless rate fall, estimates for inflation should rise. But officials reduced their inflation estimates, thanks in part to downward pressures from lower oil prices and a stronger dollar. They don’t see the inflation rate, as measured by the Commerce Department’s personal consumption expenditure price index, reaching their goal of 2% until 2018, near the end of Janet Yellen’s first term as chairwoman of the central bank.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented. He wanted to raise the Fed’s target interest rate by a quarter percentage point.
With market expectations for a rate move Thursday so low, raising rates now would have been a gamble for Ms. Yellen, who is known around the central bank for being risk-averse. An unexpected increase might have shaken or confused investors. In holding off, Ms. Yellen is sticking to a course of setting the stage for a move carefully.
Investors now await Ms. Yellen’s press conference, at which she’ll elaborate on the central bank’s views on the outlook for the economy and policy. She is scheduled to deliver a major speech next week at the University of Massachusetts in Amherst.
