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11 02 2016 | by Victor Xing | Central Banks

November FOMC: forward guidance and the return of “some”

November FOMC

The November FOMC largely met market expectations by highlighting further progress toward the Fed’s dual mandate, and the Committee reused a keyword last appeared before the 2015 rate hike to communicate closer proximity to the next step in policy normalization.  The following changes were seen in the latest FOMC statement:

  • Both realized inflation and market measures of inflation compensation have risen
  • The Committee no longer expected inflation to remain low in the near term due to lower energy prices
  • Moderating household spending (vs. “growing strong” in September)
  • The case for policy normalization “continued” to strengthen (vs. “strengthened” in September)
  • Only “some” further evidence of progress toward policy objectives are needed before the next rate hike

The last point was a direct reference to the July 2015 FOMC statement, when the Committee added one word, “some,” to its forward guidance.  Market participants correctly interpreted that the FOMC did not need to see much more tightening in labor market slack to satisfy “liftoff” conditions:

November FOMC
July 2015 vs. June 2015 FOMC statement, featuring a single change in forward guidance:”some”

Nevertheless, any early summer 2015 plans to raise rates in September were dashed by subsequent market volatility, as pre-emptive steps taken by the PBOC to release renminbi’s “accumulated depreciation pressure” triggered a risk asset sell-off in August.  Thus, the addition of “some” was by no means a guarantee of imminent rate hike, for changing economic and financial conditions can alter Fed projections.

President Rosengren voted with the majority

On a final note, Boston Fed President Rosengren did not dissent at the latest meeting, but this does not imply a change in policy stance.  Instead, President Rosengren had previously highlighted that there is little difference in making a policy decision in November vs. December, that “a delay of one meeting, in no econometric model does that make an economic difference. Now if you start waiting quarters that starts making an economic difference.”

Additionally, President Rosengren saw prudence in not acting prior to the U.S. presidential election, for he will take into account “to the extent that an election changes my forecast in a material way.”

Next article11 01 2016 | by Victor Xing | Economics

September PCE: goods and energy inflation lead the index