FOMC meeting It all depends on the data

Overall, the combined statement, updated projections and in particular Fed Chair Yellen’s comments at the press conference leave a more hawkish feel than in October. The key take away is that any future decisions are dependent on incoming data and the FOMC does not feel precommitted to keep the funds rate at the current level for any particular period. Yellen did, however, state that “the committee considers it unlikely to begin the normalization process for at least the next couple of meetings”, but beyond that, it all depends on the data.

Yellen also made it clear that the coming hiking cycle will not be at a measured pace as in 2004/2005, i.e. 25bp per meeting, but will be dependent on incoming data. This means that even though the fed funds rate is below the normal level at this point of the economic cycle, the pace of increase will follow the change in economic conditions. So what is the FOMC looking for before it will start hiking? We also got a bit wiser on that from Yellen’s comments.

“And as I mentioned, most participants do envision that conditions will be appropriate sometime during this coming year to begin normalizing policy, and they do largely expect that core inflation will probably be running close to its current level, and headline inflation could even be lower. But what they will want to have is a feeling of reasonable confidence that when we start the process of normalizing policy, that it will be moving up over time. And of course as labor market conditions continue to improve, history suggests that as long as inflation expectations remain well anchored, that that's likely to occur”.

Which in essence suggests that as long as the labour market continues to improve and survey based inflation expectations are stable, the Fed will most likely hike rates by midnext year.

Turning to the details, as expected, the FOMC added a new wording to the statement saying that “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy”. However, this was followed by the sentence “The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October” and asked at the press conference, Yellen explained that the reason for the change was primarily that it felt wrong to refer to an asset purchase program which had already ended.

Three members chose to dissent. Richard Fisher and Charles Plosser, who are the two known überhawks of the FOMC voted against and on the other end of the scale is Narayana Kocherlakota, who was worried about downside risks to inflation. All three will lose their voting rights next year.

In terms of the projections, the dots reflecting the fed funds rate were lowered slightly, with the median projection for 2015 now 1.125% (previous 1.375%), for 2016 2.5% (previous 2.875%) and for 2017 3.625% (previous 3.75%). The revisions to the economic projections were minor, most notable was the downward revision to the unemployment rate (see table below).