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Fed, Yellen keep ‘considerable time,’ miss great opportunity

Nicole Goodkind
Nicole Goodkind

The latest statement from the FOMC was a considerable disappointment to Fed watchers who were hoping Fed Chair Janet Yellen would hint at when the central bank might raise short-term interest rates which have been hovering near 0%.  Fed watchers have been waiting for the central bank to trim the phrase  the “considerable time,” which the Fed decided to retain at the conclusion of its latest meeting Wednesday. Under current guidance, most Federal Reserve officials believe the first rate hikes won’t begin until 2015.

When asked to clarify her stance on when rates may rise, Yellen remained vague, saying there is no, “mechanical interpretation” of considerable time and that, “It is highly conditional and it is linked to the committee’s assessment of the economy.”

“I think the Fed had a great opportunity to eliminate that ‘considerable time’ language today,” says Bob Brusca, Chief Economist at FAO Economics, “at a time that the inflation data are very benign they could take that off and everybody could see that there’s no reason for rates to go up. They could do it without any risk.” The next time they do it, he warns, “they might not be so lucky with market conditions.”

The Federal Reserve on Wednesday also released predictions for rates in 2017, which show short-term rates at around 3%, projections show that they will reach 1.25% by the end of 2015 and 2.75% in 2016.

The Federal Reserve will continue tapering its bond-buying program and will end its purchasing altogether next month. As expected, The Federal Reserve will slow its purchasing of mortgage-backed securities to $5 billion per month from $10 billion and will purchase short-term securities at a pace of $10 billion per month from $15 billion per month.

The FOMC’s decision was 8-2, with Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissenting. Fisher asked for an “earlier reduction in monetary accommodation,” given the improved labor outlook and market stability. Plosser, according to the statement, “objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.”

“There seemed to be something going on behind the scenes,” says Brusca, “that is more hawkish.”

Of considerable hawkish interest is the Fed’s statement on, “Policy Normalization Principles and Plans,” which elaborates on its exit strategy. According to the statement the Fed will rely on the interest of excess reserves and their overnight repo facility among other things to safely exit.

“What you see from this,” says Brusca, “is a lot of tentative plans. The Fed is not exactly sure. They think they know, but they’re not really sure how it’s going to work in the real world and so they’re giving themselves some wiggle room.”

Overall, however, the Fed’s stance appeared to be more dovish than before—the FOMC pointed to “significant underutilization of labor resources,” and stated that, “Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.

Markets reacted well to the news, with the Dow closing at a new high.