Market observers are parsing every comment from the Federal Reserve (Fed)’s most recent statement and Fed Chair Janet Yellen’s accompanying press conference, trying to determine where the Fed’s words fall on the “dovish” to “hawkish” spectrum.
If I had to weigh in on the debate, I’d say the September Federal Open Market Committee (FOMC) policy statement was “hawkish.” But more importantly than such nomenclature, I believe there were five signs in the statement that the anticipated pace of policy rate hikes is going to be quicker than markets have expected.
Toned down “dovish” phrases. While the September statement retained both “keyword phrases” that are interpreted as highly dovish (“maintain the current target range for the federal funds rate for a considerable time” and “significant underutilization of labor resources”), Fed Chair Yellen appeared to dilute the strength of the “considerable time” language in her press conference, implying that a “considerable time” could be a shorter time period than many expect.
Back in March, Chair Yellen, perhaps mistakenly, said that a “considerable time” was six months. Then, at her September press conference, she said “a considerable time” isn’t mechanical, shouldn’t be read explicitly in calendar terms, will be data dependent and could come sooner than many expect. In other words, it could be three months, or if data weaken, it could be 12 months. Given that current economic data are solid, as the Fed acknowledges (see more on that below), a “considerable time” is likely to be shorter rather than longer. In other words, to me, Chair Yellen’s comments go a long way toward weakening the Fed’s dovish language.
Revised estimates of the path of policy rates. A bit incongruously with the aforementioned key dovish statements, the FOMC signaled a meaningful upward revision in the Fed funds policy rate for the year-end of both 2015 and 2016.
Acknowledgment that the economy is improving. I anticipate that the weak August payroll report will be revised higher and that inflation should firm. Along with their revised expectation of the path of policy rates, Fed officials seem to be on the same page as me. They acknowledged the broad-based tightening in employment conditions over the past several months as well as today’s stable inflationary conditions, and they released updated economic projections.
While Fed officials believe real gross domestic product (GDP) will come in lower than expected in 2014 and 2015, the FOMC members acknowledged that the unemployment rate is likely to decline more rapidly than anticipated. Further, their inflation projections remained fairly stable, trending toward the long-run goal of 2% near the end of 2017.
An increasingly active debate about the future path of policy rates is underway at the Fed today. The most recent statement made it clear that there’s increasingly active debate within the FOMC over the appropriate path of interest-rate policy given how far the economy has come.