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  • Fed Brief

    May 22 2015 - FOMC Minding the Data, Not the Calendar

    The new guidance from the Federal Open Market Committee (FOMC) is that it won't be giving any calendar-based guidance when it comes to the potential timing of the first hike in the federal funds rate. Its thinking has been watered down simply to the approach of watching incoming data and determining if it is signaling sustained progress toward the FOMC's objectives of maximum employment and 2 percent inflation.

    The FOMC didn't say specifically it is nixing its calendar-based guidance, but it was implied in the directive, which didn't contain any calendar-based references. Recall that the directive from the March 17-18 FOMC meeting said, "...the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting."

    There was no specific reference this time around to the June meeting, the July meeting, the September meeting, or any future meeting.

    What can be inferred from the calendar-based deletion is that every meeting from here on out should be considered by the market as a possible time when the FOMC might raise the fed funds rate, subject of course to what the data in the interim suggests about the progress (or lack thereof) the Fed is making toward its dual mandate.

    On balance, it was a directive that read pretty much like market participants thought it would read ahead of its release.

    It did not have a hawkish tone to it, unless one wants to read too much into the Fed's view that it expects economic activity to expand at a moderate pace even though growth in output and employment slowed during the first quarter.

    The aforementioned slowdown, the Fed said, in part (emphasis our own) reflected transitory factors. In turn, it was once again acknowledged that inflation continued to run below the FOMC's longer-run objective, partly (emphasis our own) reflecting earlier declines in energy prices and decreasing prices of non-energy imports.

    The first paragraph of the directive also pointed out that the pace of job gains moderated, that growth in household spending declined, that business fixed investment softened, and that exports declined.

    With those elements at the forefront of the Fed's data-based assessment, one is hard-pressed to think the Fed will be confident about raising the fed funds rate in June since it will want to have a stronger sense of assurance that any improving data between now and then is indeed sustainable.

    The big picture takeaway, though, is that the FOMC is still emphasizing that it is leaning toward raising the fed funds rate. To be sure, even though it is focused on the data, the language of the directive is not prepping market participants for the likelihood of further accommodation. The latter could happen if the data point in that direction, yet the Fed's base case leaves it more conscientious about prepping the market for an eventual rate hike.

    When the long-awaited rate hike happens is still the great unknown, which means the Fed put is still intact.

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

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