Preamble
Here we provide a backwards prospective of FOMC decisions, from Dec 2015 through Dec 2016, as reasoned in the FOMC press conference transcripts. The progression from "we're finally ready to do this, baby steps!" to the FOMCs attempt at a Jedi mind-trick, "monetary policy magically tightens because we lowered our pretend target" is worth the review. Unfortunately, it calls into question the monetary policy objectivity of this FOMC, which continues to emphasize political or financial market gyrations ahead of its mandate.
Why We Focus on FOMC Meetings with Press Conferences
There are eight regularly scheduled FOMC meetings per
year (FOMC
meeting calendars, statements and minutes ) spaced approximately six weeks
apart. In March 2011, then-Chair Ben Bernanke announced that he would begin
holding quarterly press conferences after FOMC meetings, in order to “further
enhance the clarity and timeliness of the Federal Reserve’s monetary policy
communication.” In theory, the press conferences - which occur every other meeting
- should impact neither the timing or pace of FOMC decisions to raise or lower
rates. In reality, financial market participants and Fed watchers quickly
presumed any substantive shift in the stance of monetary policy would only
occur at “live” meetings, when the Chair has the opportunity to elaborate on
(or perhaps justify) the FOMC’s decision during the press conference. Although
FOMC members have murmured from time to time that meetings without press
conferences scheduled should still be considered “live”, in fact no significant
change or communication regarding monetary policy or the FOMC’s economic
outlook has since occurred at a meeting which is not followed by a press
conference.
The FOMC also releases an updated version of its Summary
of Economic Projections (SEP) at each regularly scheduled meeting which is followed
by a press conference. The SEP contains summary data of FOMC members economic
forecasts, including:
·
Changes in real economic growth (GDP);
·
The unemployment rate;
·
Inflation, as measured by personal consumption
expenditures (PCE) and core PCE; and
·
Projections for the appropriate path of monetary
policy - the level of the fed funds target rate –consistent with their economic
outlook.
Objectives of
Monetary Policy
Excerpts from a Federal Reserve Board FAQ titled, What are the Federal
Reserve's Objectives in Conducting Monetary Policy? (edited for brevity):
The Congress established the
statutory objectives for monetary policy--maximum employment, stable prices,
and moderate long-term interest rates--in the Federal Reserve Act.
The FOMC judges that inflation
at the rate of 2 percent (as measured by the annual change in the price index
for personal consumption expenditures, or PCE) is most consistent over the
longer run with the Federal Reserve's statutory mandate.
The maximum level of employment
is largely determined by nonmonetary factors that affect the structure and
dynamics of the job market. These factors may change over time and may not be
directly measurable. In the FOMC's December 2016 Summary of Economic
Projections, Committee participants’ estimates of the longer-run normal rate of
unemployment ranged from 4.5 to 5.0 percent and had a median value of 4.8
percent.
Two objectives of
monetary policy: The Fed has long interpreted its statutory objectives for
monetary policy as a dual mandate for (1) maximum employment and (2) low
inflation ( = stable prices + moderate long-term interest rates).
Not an objective of
monetary policy: Everything else. That includes stoking or impeding US
economic growth, global economic growth, fiscal policy, tax policy, the
integrity or stability of the financial markets (which arguably falls under the
Fed’s regulatory objectives and mandate, but not its monetary policy
objectives), fretting about the Brexit vote, the Greek debt crisis, performance
of the equity markets, or the volatility of the foreign exchange markets. Just
to name a few.
FOMC Meeting of December
16, 2015 – liftoff.
The FOMC finally begins what is billed as a gradual
tightening of monetary policy, and raises interest rates from the “zero lower
bound.” The FOMC increases the target fed funds rate from a range of 0% to
0.25%, to a range of 0.25% to 0.50%, and the IOR rate in tandem from 0.25% to
0.50%. The median forecast of FOMC
members, as released in the Dec
16 2015 SEP , projects the appropriate path of monetary policy would lift the
upper bound of the fed funds target range by 100 bps, to 1.50% by year-end 2016
and 2.50% by year-end 2017, assuming their economic forecasts are achieved.
Throughout this piece the indented text are excerpts from Chair
Yellen’s remarks from various FOMC press conference transcripts (edited for brevity, formatting and
subheadings added for clarity, emphasis mine):
Overview
This action marks the end of an
extraordinary seven-year period during which the federal funds rate was held
near zero to support the recovery of the economy from the worst financial crisis
and recession since the Great Depression. It reflects the Committee’s
confidence that the economy will continue to strengthen.
Room for further improvement in
the labor market remains, and inflation continues to run below our longer-run
objective.
The process of normalizing interest rates is likely to proceed gradually,
although future policy actions will obviously depend on how the economy evolves relative to our objectives of maximum employment and 2 percent inflation.
Unemployment and GDP
The unemployment rate, at 5
percent in November, is down 0.6 percentage point from the end of last year and
is close to the median of FOMC participants’ estimates of its longer-run normal
level.
The improvement in employment
conditions this year has occurred amid continued expansion in economic
activity. U.S. real gross domestic product is estimated to have increased at an
average pace of 2¼ percent over the first three quarters of the year.
Inflation
Overall consumer price
inflation— as measured by the price index for personal consumption
expenditures—was only ¼ percent over the 12 months ending in October.
However, much of the shortfall
from our 2 percent objective reflected the sharp declines in energy prices
since the middle of last year, and the effects of these declines should
dissipate over time.
The appreciation of the dollar
has also weighed on inflation by holding down import prices. As these
transitory influences fade and as the labor market strengthens further, the
Committee expects inflation to rise to 2 percent over the medium term.
Rationale for Raising
Interest Rates
With inflation currently still
low, why is the Committee raising the federal funds rate target?
Much of the recent softness in
inflation is due to transitory factors that we expect to abate over time, and
diminishing slack in labor and product markets should put upward pressure on
inflation as well.
In addition, we recognize that
it takes time for monetary policy actions to affect future economic outcomes. Were the FOMC to delay the start of policy
normalization for too long, we would likely end up having to tighten policy
relatively abruptly at some point to keep the economy from overheating and
inflation from significantly overshooting our objective. Such an abrupt
tightening could increase the risk of pushing the economy into recession.
Fed Funds Forecast
The median projection for the federal funds rate rises gradually to
nearly 1½ percent in late 2016 and 2½ percent in late 2017.
As the factors restraining
economic growth continue to fade over time, the median rate rises to 3¼ percent
by the end of 2018, close to its longer-run normal level.
The Committee currently expects that, with gradual adjustments in the
stance of monetary policy, economic activity will continue to expand at a
moderate pace and labor market indicators will continue to strengthen.
Although developments abroad still pose risks to U.S. economic growth, these
risks appear to have lessened since last summer. Overall, the Committee sees
the risks to the outlook for both economic activity and the labor market as
balanced.
So on December 16th, 2015, the FOMC itself
projected they would raise the target rate 4
times in 2016, or approximately at every other meeting (presumably at the
“live” meetings). Instead they raised interest rates once - a year later at the
December 2016 meeting. What the hell happened?
FOMC Meeting of March
16, 2016 – the FOMC immediately gets cold feet, and pauses the rate hikes.
Excerpts from Chair
Yellen’s remarks at the press conference (edited for brevity, formatting and
subheadings added for clarity):
Overview
Today the Federal Open Market
Committee decided to maintain the target range for the federal funds rate at ¼
to ½ percent. Our decision to keep this accommodative policy stance reflects
both our assessment of the economic outlook and the risks associated with that
outlook. The Committee’s baseline
expectations for economic activity, the labor market, and inflation have not
changed much since December: With appropriate monetary policy, we continue
to expect moderate economic growth, further labor market improvement, and a
return of inflation to our 2 percent objective in two to three years. However, global economic and financial
developments continue to pose risks. Against this backdrop, the Committee
judged it prudent to maintain the current policy stance at today’s meeting.
Unemployment
The
labor market continues to strengthen.
Over the most recent three months, job gains averaged nearly 230,000 per month,
similar to the pace experienced over the past year.
The
unemployment rate was 4.9 percent in
the first two months of the year, about in line with the median of FOMC
participants’ estimates of its longer-run normal level.
A
broader measure of unemployment that includes individuals who want and are
available to work but have not actively searched recently and people who are
working part time but would rather work full time has continued to improve.
Of
note, the labor force participation rate
has turned up noticeably since the fall, with more people working or
actively looking for work as the prospects for finding jobs have improved.
But
there is still room for improvement: Involuntary part-time employment remains
somewhat elevated, and wage growth has yet to show a sustained pickup.
Inflation
Overall
consumer price inflation—as measured
by the price index for personal consumption expenditures—stepped up to 1¼ percent over the 12 months ending in January, as
the sharp decline in energy prices around the end of 2014 dropped out of the
year-over-year figures.
Core inflation, which excludes energy and food prices, has also picked up, although it remains
to be seen if this firming will be sustained. In particular, the earlier
declines in energy prices and appreciation of the dollar could well continue to
weigh on overall consumer prices.
But
once these transitory influences fade and as the labor market strengthens
further, the Committee expects inflation to rise to 2 percent over the next two
to three years.
Economic Outlook
The
median growth projection edges down from 2.2 percent this year to 2 percent in
2018, in line with its estimated longer-run rate.
The
median projection for the unemployment rate falls from 4.7 at the end of this
year to 4.5 percent at the end of 2018, somewhat below the median assessment of
the longer-run normal unemployment rate.
The
median inflation projection rises from 1.2 percent this year to 1.9 percent
next year and 2 percent in 2018.
Rationale
for Not Raising Interest Rates
Since
the turn of the year, concerns about
global economic prospects have led to increased
financial market volatility and somewhat tighter financial conditions in the United States, although
financial conditions have improved notably more recently.
Economic growth abroad appears to be running at a somewhat softer pace than previously expected.
These
unanticipated developments, however, have not resulted in material changes to
the Committee’s baseline outlook (because):
·
Market
expectations for the path of policy interest rates have moved down, and
·
The accompanying
decline in longer-term interest rates should help cushion any possible adverse
effects on domestic economic activity.
Indeed,
while stock prices have fallen slightly since the December meeting and spreads
of investment-grade corporate bond yields over those on comparable-maturity
Treasury securities have risen, mortgage rates and corporate borrowing costs
have moved lower.
The
Committee will continue to monitor these developments closely and will adjust
the stance of monetary policy as needed to foster our goals of maximum
employment and 2 percent inflation.
Fed
Funds Forecast
Compared
with the projections made in December (editor: only 3 months ago) the median path is about ½ percentage
point lower this year and next; the median longer-run normal federal funds rate
has been revised down as well.
Most
Committee participants now expect that achieving economic outcomes similar to
those anticipated in December will likely require a somewhat lower path for
policy interest rates than foreseen at that time.
Followed by two paragraphs
of why the FOMC member’s projections for the fed funds rate are individual
forecasts, but not “plans” for future policy, because the future is uncertain
and unexpected things happen and don’t ever hold us to a decision or an
outlook. God forbid anyone need to make investment decisions or recommend a
trading strategy based upon future interest rates.
First question out of the gate (from my hero, Steve
Liesman):
Madam
Chair, as you know, inflation has gone up the last two months. We had another
strong jobs report, the tracking forecasts for GDP have returned to 2 percent,
and yet the Fed stands pat while it’s in a process of what it said it launched
in December was a “process of normalization.” So I have two questions about
this:
1. Does the Fed have a credibility problem, in the sense
that it says it will do one thing under certain conditions but doesn’t end up
doing it?
2. And then, frankly, if the current conditions are not
sufficient for the Fed to raise rates, well, what would those conditions ever
look like?
I will spare you Chair Yellen’s answer, but it boils down
to the following:
·
The “median forecast” for the appropriate path
of monetary policy is meaningless, because the FOMC is ruled by the doves, and
I am their queen.
·
Global growth outside the United States is
slowing and there has been some widening of credit spreads (the spread between
US Treasuries and investment grade or high yield bonds). Despite the fact that
these events have at best tertiary impact on our mandate, we are still
collating.
·
So when we said we were going to gradually raise
rates, we meant at the pace of a tortoise, because we prefer to make no
decision at all than to make a decision which might, you know, have
consequences.
FOMC Meeting of
June 15th, 2016 - wherein
the FOMC enters the Twilight Zone.
I can’t with this meeting. Here’s the synopsis:
·
The economic data was mixed. It vexes us.
·
GDP growth in late 2015 / early 2016 was
“lackluster,” though they expected it to improve.
·
Job market gains averaged 200k per month - though
April and May were weaker at 80k per month - and the unemployment rate fell to 4.7% in May.
·
Yellen (roughly paraphrased): “yabbut, that’s
because more people dropped out of the labor force (they’re called boomer retirees,
Janet), and besides, there are still too many people working part-time who want
full-time jobs.” Editor’s note: Not
Your Problem.
·
The year-end median forecast for the
unemployment rate – which has been revised lower to 4.6% - is now below the FOMC’s assessment of the
longer-run normal unemployment rate.
·
Average hourly earnings increased 2.5% over the
prior 12 months, a “welcome indication that wage growth may finally be picking
up.” Grammar and thought police: Wage
growth, in fact, picked up. For a
whole year. Remember, it’s historical data.
·
Inflation rose to 1% for the 12 months ending in
April. Core inflation (ex food and energy) was running closer to 1.5% over the
same period. Both moving higher towards the stated target.
Rationale for Still Not Raising Interest Rates
This
decision (not to raise interest rates) reflects the Committee’s careful
approach in setting monetary policy, particularly in light of the mixed
readings on the labor market and economic growth that I have discussed, as well
as continuing below-target inflation.
Although
the financial market stresses that emanated from abroad at the start of this
year have eased, vulnerabilities in the global economy remain.
In
the current environment of sluggish global growth, low inflation, and already
very accommodative monetary policy in many advanced economies, investor
perceptions of, and appetite for, risk can change abruptly.
We
continue to expect that the evolution of the economy will warrant only gradual
increases in the federal funds rate. We expect the rate to remain below levels
that are anticipated to prevail in the longer run because headwinds weighing on
the economy mean that the interest rate needed to keep the economy operating near
its potential is low by historical standards. These headwinds—which include developments
abroad, subdued household formation, and meager productivity growth—could
persist for some time.
Editor’s note:
The “vulnerabilities in the global economy” and “developments abroad” that
Yellen is alluding to is a feared reaction to the UK’s Brexit vote, which is
mere days out from this meeting (it took place on June 23rd, 2016). She
is asked about it during the Q&A, but we don’t rehash it since:
a)
It has so far not
turned out to be some huge global disaster; and
b)
Even the most
bearish economists did not expect it to – nor has it had - a big impact on the
US economy.
On a closing note, the
FOMC reports that its (completely meaningless and laughably wrong) median forecast
/ projection for the fed funds rate for year-end
2017 is now 1.50%, rising to 2.50% for year-end 2018.
FOMC Meeting of September 21, 2016 – the one where
the FOMC actually said “instead of raising rates we lowered our forecast.”
In a nutshell:
o
Economic growth had substantially improved. The
drivers were higher household spending, based on solid increases in household
incomes, consumer sentiment and wealth.
o
Job gains rebounded to average ~180k per month
over the preceding 4 months, and the unemployment rate was stable at 4.9%.
o
Inflation was just below 1%, with the shortfall
again attributed to the transitory factors of low energy and import prices.
Core inflation was 1.5%.
In fact, the economy was doing so well, that the focus of
the Yellen’s remarks revolved around a laborious attempt to justify not raising
rates.
The “Neutral Fed Funds Rate”
Gets a Promotion
The recent pickup in economic
growth and continued progress in the labor market have strengthened the case
for an increase in the federal funds rate. Moreover, the Committee judges the
risks to the outlook to be roughly balanced. So why didn’t we raise the federal funds rate at today’s meeting? Our
decision does not reflect a lack of confidence in the economy.
(blah blah nothing to see here
blah)
We continue to expect that the
evolution of the economy will warrant only gradual increases in the federal
funds rate over time to achieve and maintain our objectives. That’s based on
our view that the neutral nominal
federal funds rate—that is, the interest rate that is neither expansionary
nor contractionary and keeps the economy operating on an even keel—is currently quite low by historical
standards. With the federal funds rate modestly below the neutral rate, the current stance of monetary policy
should be viewed as modestly accommodative, which is appropriate to foster
further progress toward our objectives. But since monetary policy is only
modestly accommodative, there appears little
risk of falling behind the curve in the near future, and gradual increases
in the federal funds rate will likely be sufficient to get to a neutral policy
stance over the next few years.
So this economic construct
– this fictitious rate that the FOMC made
up – moves around based on their projections for some future state of the
economy. Now instead of raising interest rates congruent with: their monetary
policy objectives, and the plan outlined nine months prior (and almost
immediately abandoned), the FOMC claims that the target fed funds rate at a
whopping 0.50% is now only “modestly accommodative” because it’s long term
neutral level is lower than previously guesstimated. Three months prior in June the FOMC characterized the same fed funds rate as "very accommodative".
Can someone design an
index out of this rate? I know some former Libor traders who would love to make
a market in it.
First ball, fast ball hitter Steve Liesman:
Madam
Chair, critics of the Federal Reserve have said that you look for any excuse
not to hike, that the goalposts constantly move. And it looks, indeed, like
there are new goalposts now when you say looking for “further evidence” and—and
you suggest that it’s evidence that labor—labor market slack is “being taken up.”
Could you explain what “for the time being” means, in terms of a time frame,
and what that further evidence you would look for in order to hike interest
rates? And also, this notion that the goalposts seem to move, and that you’ve
indeed introduced a new goalpost with this statement.
I think you had to be
there to truly appreciate the obfuscation in her answer. If you’re interested,
it is in the transcript
(starting on page 5 of 24).
Tuesday, November 8, 2016 - Donald Trump wins the presidential election and Republicans
take a majority of seats in both chambers of Congress.
Over time: Legislation
dating back to 2008 to “audit the Fed” is revived. Pressure on Yellen to resign
as Fed Chair increases. Yellen states publicly and candidly that she intends to
complete her term as Chair, which ends in January of 2018. Fed Governor Daniel
Tarullo – architect of an enormous amount of banking and financial markets
regulation phased in following the financial crisis – announces his
resignation, effective April 2017. Trump and the Republicans begin planning
legislation to scale back parts of Dodd-Frank, to repeal or reconstruct pieces
of Obamacare, to implement fiscal stimulus, to revamp and simplify tax policy. The
equity markets tear higher.
FOMC Meeting of December 14th, 2016 – the FOMC
raises the target fed funds rate and nudges their economic projections higher.
The economic growth
picture and employment data was roughly in-line with where it had been in
September, though the unemployment rate hit a post-crisis low of 4.6% in
November, the lowest level since 2007. Inflation ticked higher to 1.5%, as
expected due to the rebound in energy prices. Core inflation rose to 1.75%.
The more meaningful change
was the shift in tone in Yellen’s prepared remarks for the press conference.
Gone were several of the dovish explanations for why the FOMC was effectively
discounting good data by emphasizing lingering areas of weakness.
Some excerpts:
Today
the Federal Open Market Committee decided to raise the target range for the
federal funds rate by ¼ percentage point, bringing it to ½ to ¾ percent. In
doing so, my colleagues and I are
recognizing the considerable progress the economy has made toward our dual
objectives of maximum employment and price stability. Over the past year, 2¼ million net new jobs have been created,
unemployment has fallen further, and
inflation has moved closer to our longer-run goal of 2 percent. We expect
the economy will continue to perform well, with the job market strengthening
further and inflation rising to 2 percent over the next couple of years.
Job
gains averaged nearly 180,000 per month over the past three months, maintaining
the solid pace that we’ve seen since the beginning of the year. Over the past seven years, since the depths
of the Great Recession, more than 15 million jobs have been added to the U.S.
economy. The unemployment rate fell to 4.6 percent in November, the lowest
level since 2007, prior to the recession. Broader measures of labor market
slack have also moved lower, and participation in the labor force has been
little changed, on net, for about two years now, a further sign of improved conditions in the labor market given the
underlying downward trend in participation stemming largely from the aging of
the U.S. population.
Recall the transcript for
the June 2016 meeting, where the drop in the unemployment rate in April to 4.7%
was written off by the FOMC because
it was driven by a drop in labor force participation, in favor of focusing on a
measure of labor market slack – the number of part-time workers who want
full-time jobs. These two metrics, which were worrisome enough in June and
September to contribute to the FOMC deciding not to raise rates, are suddenly
improving if understood in the context of a long-term trend. No kidding.
The more disturbing theme
is that the FOMC press conference remarks seem to have taken on the tone of a
campaign speech. It could be a campaign for Yellen to keep her job, for the
Federal Reserve to avoid additional scrutiny of their regulatory and policy
decisions, or a long overdue recognition that eight years post-crisis the
economy has recovered and it may
continue to improve if the FOMC gets its fanny off the yield curve.
FOMC Meeting of Tuesday, March 15th, 2017 – if you don’t
believe the Fed is going to raise rates and come out sounding like a bunch of
hawks, you clearly haven’t been paying attention.
If you’re still reading, I
applaud you. I am genuinely, deeply grateful.
