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Current Views

We Are All Data Dependent Now

The Federal Open Market Committee (FOMC) is no longer “patient”, but they have not become impatient either. 

For over six years, the target Federal Funds Rate has been zero bound, a level the FOMC has acknowledged as overly accommodative. With the release of the FOMC meeting statement on March 18, 2015, the word “patient” was dropped from the language. It was used to refer to the timeframe before they would need to begin to normalize policy. As long as they were patient, it was expected that short-term interest rates were not going to budge higher. 

At the same time, removing the term is not necessarily a message that short-term interest rates are going to move immediately either, and that is clear to us from the minutes of that meeting released April 8, 2015.

As we are aware, and consistent with its statutory mandate, the FOMC seeks to foster both maximum employment as well as price stability. It endeavors to balance these dual goals largely with the use of one tool: the Federal Funds Rate. With the rate close to zero since December 2008, what exactly would have to happen for the FOMC to increase it?

They help us with the answer to that in communicating that they have target levels in mind when they speak about goals for price stability and employment. Here’s what they have to say about inflation:

“Participants saw inflation, as measured by the four-quarter change in the price index for personal consumption expenditures (PCE), slowing this year but picking up notably next year; almost all of the participants projected that inflation would be at or close to the Committee’s 2 percent longer-run objective in 2017.” 

We believe it would be generous to say that the PCE is climbing at as much as 0.5% year over year right now. Given the Committee’s projection that it might hit their 2% goal in two years, it would appear that there would be no imminent rate rise due to inflation fears. 

What about the rapid drop in the unemployment rate, currently sitting at 5.5%, down impressively from a peak of 10.0% in October 2009?  Here’s their view:

“More than half of the participants revised down their estimates of the longer-run normal rate of unemployment; as a result, the central tendency of these estimates shifted down to 5.0 to 5.2 percent. Several participants noted that still-subdued wage and price inflation despite the stronger-than-expected momentum in the labor market suggested a lower level of the longer-run normal unemployment rate than they had thought previously”. 

It’s pretty clear where this leaves us: we are simply data dependent. Neither the FOMC’s upper bound for inflation nor their lower bound for unemployment is currently at risk. When the data shifts, so will they, and likely everyone else too. Until inflation pushes a bit higher and we develop further job gains, we anticipate interest rates are likely to remain where they are. We believe this maintains the core supportive structure beneath both the bond and equity markets for now. 

 

 

Source: Minutes of the Federal Open Market Committee March 17–18, 2015 

 



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