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01 15 2016 | by Victor Xing | Central Banks

January FOMC communication wrap-up

The January FOMC communication blackout will begin on the 19th, a week ahead of the 26th to 27th policy meeting.  Below is a wrap-up of major FED speeches since start of the year.

The Federal Reserve has maintained its stance on looking through transient effects on inflation, and this was a major factor behind the unanimous decision to raise rates in December despite headline PCE at 0.393% YoY vs. the central bank’s 2.0% objective.  It was projected that energy prices would stabilize, and China’s economy to grow at a soft but stable pace.

FOMC Communication serve to clarify policy reaction functions specific to the dual mandate
FOMC communication continue to place significant emphasis on inflation

Chair Yellen elaborated on the FOMC’s reaction function at the December 16th press conference:

>> CHAIR JANET YELLEN: First, let me say with respect to oil prices, I have been surprised by the further downward movement in oil prices. But we do not need to see oil prices rebound to higher levels in order for the impact on inflation to wash out.

So all they need to do is stabilize. I believe there is some limit below which oil prices are unlikely to rise. If we look — to fall. If we look at market expectations, market expectations are for stabilization, and then some gradual upward movement.

So, I certainly grant that we have had a series of shocks pushing them down. But we are not looking for them to revert back to higher levels that they were at, merely to stabilize.

We—I would point out, you asked me, would we tolerate overshoots. For a number of years between 2004 and 2008, we had a series of increases in oil prices that for a series of years raised inflation above—again, we didn’t have a 2 percent objective then, but—raised it above 2 percent, and we judged those increases to be transitory as well and looked through them. We do monitor inflation expectations very carefully. If we saw in a meaningful way that inflation expectations were either moving up in a way that made it—them seem unanchored or down, that would be of concern. And we have called attention to some slight downward movements in survey measures. We are watching that, but I still judge that inflation expectations are reasonably well anchored. So, yes, we have tolerated inflation shortfalls that we thought would disappear over the medium term just as we did overshoots of inflation that we also judged to be transitory. But we do need to monitor inflation very carefully because if energy prices and the dollar were to stabilize, import prices, our expectation is that both headline and core inflation would move up. And if we failed to see that occurring in the manner that we expect, of course we need to take further action to reconsider the outlook and to put in place appropriate policy.

CRAIG TORRES. What would that action look like?

CHAIR YELLEN. Well, you know, if the economy were disappointing, we—you know, our actions wouldn’t purely be based on inflation, we would also take employment into account.

So I can’t give you a simple answer, but we would pursue a more accommodative policy because we do—certainly are committed to achieving 2 percent over the medium term.

Amid the latest bout of global market volatility and energy decline, reality has again intruded into the realm of economic projections, and investors reacted accordingly by pricing in less than 1.5 rate hikes throughout 2016.  Indeed, oil prices declining below $30 would constitute as behaving in “an unexpected manner.”

All FOMC communication are equal, but some are more equal than others.  This analysis will highlight comments by the following FED officials:

  • Vice Chair Fischer
  • New York Fed President Dudley
  • Atlanta Fed President Lockhart
  • Boston Fed President Rosengren
  • Cleveland Fed President Mester
  • San Francisco Fed President Williams
  • Dallas Fed President Kaplan

Federal Reserve speeches and interviews do not happen without reasons, as policymakers are aware that financial market participants would pay close attention and adjust their expectations via market prices.


FOMC Communication wrap-up:

Market levels on Dec 31st, 2015:

  • Oil (WTI): 37.04
  • Shanghai Stock Exchange Composite Index: 3539.18
  • S&P 500: 2043.94
  • DXY: 98.631

Jan 15th (Oil at 29.42, SHCOMP at 2900.97 3539.18, S&P 500 at 1880.33, DXY at 98.956)

New York Fed President Dudley

  • Economic outlook hasn’t changed much since December FOMC
  • The most concerning risk to the inflation outlook is inflation expectations become unanchored to the downside
  • Economy to grow slightly above 2% in 2016
  • The gap between market pricing and FED projection in the number of rate hikes is not a concern
  • Core inflation “quite stable” despite energy price drop
  • As long as the economy continues to grow at an above-trend pace, the increase in resource utilization will be sufficient to push both inflation and inflation expectations higher over time
  • Will consider negative rates if economy weakens

Dudley on FED’s SOMA reinvestment policy

  • No specific funds rate target for ending SOMA reinvestment
  • Support continuing reinvestment until funds rate “higher”

San Francisco Fed President Williams

  • Does not see signs that asset values are depressed or below normal
  • Aware of “low expectations” for the January FOMC but will go into the meeting with “open mind”
  • On-going commodity drop has to be “taken into account”
  • FED should not get caught up in market expectations
  • “Big question” for the FED is inflation
  • FED has the option to “pause” to reassess at meetings
  • Strong dollar is a bigger issue than decline in oil prices
  • Does not worry a lot about day-to-day market moves
  • Risk now is recession, not financial system collapse
  • China’s sharp economic slowdown is a possible shock
  • U.S. economy nearly fully recovered and in good shape
  • Economy doesn’t always play out as FED expects
  • Headwinds include slower China and stronger

Jan 13th (Oil at 30.48, SHCOMP at 2949.60, S&P 500 at 1890.28, DXY at 98.933)

Boston Fed President Rosengren

  • Market volatility and other factors are furthering the concern that global growth has slowed significantly
  • Data raised possibility that U.S. growth may be slowing
  • Will remain “highly attentive” to global economic developments
  • Growth must be at or above potential to raise rates
  • “Only limited data” support projected inflation path
  • FOMC projected rate path has “downside risks”
  • Policymakers should take potential risks seriously

Dallas Fed President Kaplan (his first major policy speech, sees himself as centrist)

  • FED officials cannot overreact to market moves
  • Not sure if there will be enough data before the January meeting, but there will be enough data “between now and March”
  • Employment data helped bolster confidence in the U.S. economy
  • Non-U.S. growth forecasts are sluggish
  • U.S. and world economies need to adjust to slower China growth
  • 2016 U.S. growth to be about 2% to 2.5%
  • There is more labor market slack at this unemployment rate
  • Has a bias toward normalizing monetary policy
  • Too soon to say if four rate hikes are justified this year, “not baked in the cake”
  • Oil price slump helps consumers and car sales
  • There is definitely a risk that the FED could move too fast

Jan 12th (Oil at 30.44, SHCOMP at 3022.86, S&P 500 at 1938.68, DXY at 98.974)

Vice Chair Fischer

  • Negative interest rate would be tough to implement quickly in the U.S.
  • Monetary policy may be more constrained by the zero lower bound now
  • Productivity growth will eventually recover
  • Market view of where rates will be is too low
  • Median of 4 rate hike this year is in the ballpark
  • Uncertainty has risen a bit
  • Potential obstacles to using negative rates in the U.S.
  • Neutral rate to stay low for “policy-relevant future”

Jan 11th (Oil at 31.41, SHCOMP at  3016.70, S&P 500 at 1923.67, DXY at 98.725)

Atlanta Fed President Lockhart

  • Biased to “not move” in January, and there may not be “a great deal” of new data into the mid-March FOMC meeting [in assessing inflation]
  • Global stock sell-off unlikely to hurt the U.S. economy, but prolonged uncertainty over China could be impactful
  • Global economic environment is a downside risk vs. potential upside risk in growing domestic investment
  • Dollar’s restrain on export could be ebbing
  • The economy is growing at a respectable pace (solid domestic demand amid weaker external sector) and justifies more rate rises in 2016
  • Moderate growth in 2016 at a pace between 2 to 2.5% amid tightening labor market and accelerating wage growth
  • Key focus for 2016 will be the behavior of inflation, will look for more hard evidence in the data

Jan 3rd (Oil at 37.04, SHCOMP at 3539.18, S&P 500 at 2043.94, DXY at 98.683)

Cleveland Fed President Mester

  • Does not need to see clear evidence of inflation to back more policy tightening
  • Underlying fundamentals in the U.S. are “very sound”
  • Prefer steeper path of rate hike
  • U.S. fiscal policy to modestly support growth
  • Stronger dollar reflects view of stronger U.S. growth vs. abroad


Next article01 13 2016 | by Victor Xing | Capital Markets

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