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  • Fed Brief

    Feb 3 2016 - FOMC Not Ready to Wave the White Flag

    Let's get the housekeeping items out of the way first when it comes to reviewing the latest policy directive from the Federal Open Market Committee (FOMC).

    First, we know that the FOMC elected to leave the target range for the fed funds rate unchanged at 0.25% to 0.50, as expected.

    Secondly, the vote was unanimous. That, too, was expected.

    Third, the FOMC is maintaining its policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. No surprises there.

    The rest of the house, however, isn't necessarily in order.

    The latest FOMC directive pointed out the following:

    • Economic growth slowed late last year
    • Household spending and business fixed investment have been increasing at moderates rates in recent months versus "solid" rates before
    • Inventory investment has slowed
    • Market-based measures of inflation compensation declined further
    • Inflation is expected to remain low in the near term; and
    • The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook. In December, the Committee said only that it continues to monitor inflation developments closely.

    The FOMC of course is never going to come right out and say it is not going to raise rates at the next meeting. It has to maintain that flexibility in case there is a sudden turn of events that forces a policy action.

    The latter point notwithstanding, there were enough changes (or downgrades if you will) in the tone and wording of the recent directive to convey a sense that the FOMC is currently disinclined to raise the target range for the fed funds rate at its March meeting.

    That's a minor victory for the equity market. The hang-up is that the FOMC has still left the door open to ultimately meet its dot-plot expectation of four rate hikes by the end of the year.

    We say that because of a verbatim inclusion of its view from the December directive that it expects inflation "...to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further." It would be remiss not to add, too, that the latest directive said job gains have been strong and point to some additional decline in underutilization of resources.

    The policy directive, therefore, was only a little dovish when many market participants were hoping for a lot more cooing when it comes to a potential glide path.

    From our vantage point, the FOMC doesn't sound as if it is fully convinced by recent developments that it will have to raise the white flag on its rate-hike outlook for 2016. It will continue to monitor things closely -- as one would hope -- yet we sense the Fed still doesn't think the house out there is as disorderly as many market participants do.

    That disconnect between the Federal Reserve's lingering, glass-is-half-full view of things and the market's festering, glass-is-half-empty view of things is likely the tonic for continued volatility into the March FOMC meeting.

    --Patrick J. O'Hare, Briefing.com

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