FOMC Verdict: Dovish Bias Remains

144366870The Federal Reserve made its announcement for the FOMC policy meeting Wednesday afternoon, swinging markets from up to down — and back to up initially. The long and short of the matter is that a "considerable time" remained and a path the end of bond buying was clear. All in all, our view is that The Federal Reserve wants to remain more dovish than hawkish. Janet Yellen is not yet willing to rock the boat.

The FOMC trimmed bond buying by $10 billion per month, down to $15 billion per month — $5 billion in mortgage-backed securities and $10 billion in Treasuries.

"Considerable time" remains in the statement — "The Committee continues to anticipate, based on its assessment of these factors, 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, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored."

The FOMC said that inflation has been running below its longer-run objective. Longer-term inflation expectations have remained stable.

The Committee maintained its existing policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

This meeting in particular has been one of the most highly speculated events in the market due to potential language changes over how long rates would remain at or near zero. The Fed did signal that the bond buying is ending at the next meeting — "If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting."

The Fed was also set to release its quarterly forecasts at the same time as this announcement. It turns out that of the 17 officials, 1 called for a rate hike in 2014 and 2 called for rate hikes out in 2016 — the rest were stuck in 2015. Outlook targets were set as follows:

  • The Fed now sees GDP growth of 2.0% to 2.2% in 2014, down from 2.1% to 2.3% in June.
  • Fed sees unemployment down around 5.9% to 6.0% in late 2014, down from 6.0% to 6.1% in June.
  • The last important forecast was unchanged from June — inflation of 1.5% to 1.7% in 2014.

All in all, the view here is that Fed is not trying to rock the boat. This is more dovish than hawkish, and the only real significant view is setting a finite end to the already lower bond buying.


Filed under: Economy
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