Thursday, September 18, 2014

No surprises from the Fed

There were no surprises from the Fed this morning.  Asset purchases were trimmed again and there were only minor changes to the economic assessment.  Forward guidance was unchanged.

The pace of monthly asset purchases was trimmed from $25 billion per month to $15 billion with an indication the Committee will end the program at the October meeting.  That fits with our expectations so no surprises there.

There was some market speculation the Committee’s forward guidance would change.  In the end they continued to signal there will be a “considerable time” before the Fed funds target rate is changed following the end of the asset purchase program.   In our view a change to a more hawkish forward guidance now seemed incongruous with continued easing.  But such a change is clearly getting closer: there are now two dissenters in the ranks (Plosser and Fisher).

There was no significant change to the economic assessment.  The critical point is the committee continues to believe there is “significant underutilization of labor resources.”  The inflation language was tweaked from “inflation moved closer to target” last time to “inflation has been running below target”.  That’s a nod to more recent inflation outcomes which has seen the annual rate of inflation pull back from the spike higher earlier in the year which the Committee had attributed to “noise”.

There were also no surprises in the economic and interest rate projections (the infamous “dots”).  The only change to the growth forecasts that stood out for me was the reduction in the mid-point GDP growth forecast for 2015 which was lowered 0.3% to 2.8%.  It stood out largely because it’s been a long time since any of our US growth projections have been more optimistic than the Feds – we expect 3.0% growth in 2015.

Interest rate projections were higher from 2015 onwards.  I’m ok with that.  It always seemed to me that once the tightening starts, rate hikes would be more aggressive than the Committee was indicating.  Importantly the median projection for the long run (neutral rate) was unchanged at 3.75%.