Fed Ploughing a Deep Furrow of Confusion

By Marc Ostwald, Strategist at ADM Investor Services International Limited


If the FOMC’s objective was to convey confusion, it has succeeded, thereby ploughing a deep furrow of instability and destabilization, and shining a very bright light on the large debt and liquidity trap it and other G7 central banks have spent 7 years crafting.

As the FOMC forecast summary highlights, the Fed upgraded its forecast for GDP and Unemployment, while shading its PCE Deflator forecasts lower, which should have been more than sufficient to implement a 25 bps rate hike, accompanied by a much lower trajectory for the Fed Funds rate target. Instead, the 2015 Funds Rate median forecast stands at 0.40%, implying just a 60% chance of a rate hike by year end (notwithstanding Yellen’s comment that ‘every meeting is a live meeting’ for a policy move), while the long-term forecast has been nudged down to a still very high 3.50% from 3.80%. There was at least one dissenting vote from Lacker, but perhaps more eye catching was the one forecast for negative rates (certainly the departing uber-dove Kocherlakota).

BAML Treasury MOVE INDEX resizedYellen’s press conference was hotch potch of a rationale that was closer to meaningless babble, guidance free and self-contradiction, while suggesting that the FOMC reserves the right to interpret incoming data as it pleases, depending on how fearful it is. She emphasized that the FOMC wants to see further improvement in the labour market (when jobless claims are at the lowest since 1873!), that the housing market remains very depressed (but it is not a key policy variable) and that the Fed could look through the current bout of low inflation, while also painting a rather bleak picture of the global economy. When asked about the possibility of NIRP and / more QE, she merely observed that it was not being currently discussed, but was possible in the future. As former Minneapolis Fed president Gary Stern observed to CNBC on the timing of the first rate hike: “I take it that it’s not until next year at some time.”

The disappointment internationally was nicely encapsulated by the Korean authorities who observed that it meant an elevated level of uncertainty would continue to affect financial markets for some time. But it is the ECB and the BoJ who will now face even bigger challenges, given that the Fed is clearly not in any hurry to live up to its part of the “policy divergence” grand bargain as both central banks had been hoping. The biggest immediate challenge however is for asset allocators looking to adjust portfolios ahead of month and quarter end, given the pall of uncertainty, and myriad concerns about the global economic outlook have just been given a much unwanted shot in the arm by the Fed.


Below are the FOMC statement, a press story reflecting the confusion & highlights from Yellen’s press conference.


September 17 FOMC statement:

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.


WASHINGTON, Sept 17 (Reuters) – The Federal Reserve held interest rates near zero on Thursday, raising  questions over how it will ever manage to lift them off the floor and how effectively it will communicate plans to do so.

Only just over half economists polled have predicted such an outcome, a rare occurrence, and a sign of just how hard it has become to read the Fed these days.

Prior to the rate decision, Fed Chair Janet Yellen had not spoken in almost two months. Two of her closest allies had spoken late last month but delivered seemingly contradictory messages just days apart.

After the decision, Yellen said while it was an “unfortunate state of affairs” that every comment by a Fed official is parsed for hints about the Fed’s next move, “uncertainty in financial markets” is natural when a policy shift is near, as it is today.

Policymakers do not, she said, try to make up their minds on a daily basis based on the economic release of the moment, but use their regular meetings to take stock of the accumulated information and make a decision from there.

“We do our darndest to pull together the best analysis we can,” Yellen told a news conference.

The issue appears to be how Yellen manages the rate setting body. Like her predecessor Ben Bernanke she listens to others before speaking at the open markets committee and she appears to value forming consensus, shown by the fact that there was just one dissent in Thursday’s vote.

The language used by the Fed is aimed at giving it a high degree of flexibility when it comes to rate decisions.

That may now be a weakness when it comes to communicating where the Fed is in situations in which it might need to pivot in response to developments such as the recent market turmoil in China and beyond, possibly leading to continued volatility in financial markets.

For months the Fed has said it will only raise rates once it is “reasonably confident” that inflation will rise back to its 2-percent target. At the same time, it has said it “expects” it will rise toward that rate, despite continued misses, and without spelling out what more information would be needed.

“I think the Fed has muffed the communication going into this meeting,” said Lou Brien, analyst for Chicago trading firm DRW Holdings. “They could have offered more clarity.”

Markets were pricing in a one-in-four chance of a 25 basis point rate rise ahead of Thursday’s meeting, according to the CME Fedwatch tool.



The mixed messages in recent months mark a departure from Yellen’s pledge in an April 2013 speech to end the days of “never explain, never excuse”, when she said the Fed would “reap the benefits of clearly explaining its actions to the public”.

Yellen earlier this year became a convert to so-called data-dependent policy-making. The idea was that the Fed would say what the economic data should look like before it tightens policy allowing the public to try to figure out if incoming data met that bar.

In August, the New York Fed president William Dudley suggested that turmoil in global financial markets meant the chances of a September rate hike were receding. Just days later Fed Vice President Stanley Fischer left the door to a rate rise open.

That made the Fed look like a “Tower of Babel,” said Wells Fargo economist John Silvia.
Still, not all investors were thrown by the Fed’s lack of clarity. In their view, Fed policy-setters simply cannot make the kind of guarantees on rates that they used during the depths of the recession.

And with data – and global financial turmoil – pushing the Fed is different directions, Yellen may have made the right choice in staying silent, rather than risk appearing to be overly swayed by one economic data or another.

“The best you can hope for is guidance around progress being made toward their objectives,” said Craig Bishop, lead strategist for  the U.S. fixed income group at RBC Wealth Management, which has $275 billion under management.


– HIGHLIGHTS: Fed chief Yellen’s news conference after FOMC meeting –

WASHINGTON, Sept 17 (Reuters) – The following are highlights from Federal Reserve Chair Janet Yellen’s press conference on Thursday following the end of a two-day meeting of the U.S. central bank’s policy-setting committee.

“If we waited until inflation is back to 2 (percent), and
that will probably mean that unemployment had declined well
below our estimates of the natural rate, and only then did we
start to begin to … diminish the extraordinary degree of
accommodation for monetary policy, we would likely overshoot
substantially our 2-percent objective and we might be faced with
then having to tighten monetary policy in a way that could be
disruptive to the real economy. And I don’t think that is a
desirable way to conduct monetary policy.”

“The Fed should not be responding to the ups and downs of
the markets and it is certainly not our policy to do so. But
when there are significant financial developments, it’s
incumbent on us to ask ourselves what is causing them. And of
course while we can’t know for sure, it seemed to us as though
concerns about the global economic outlook were drivers of those
financial developments.
“And so they have concerned us in part because they take us
to the global outlook and how that will affect us.
“And to some extent, look, we have seen a tightening of
financial conditions during, as I mentioned, during the
inter-meeting period. So the stock market adjustment, combined
with a somewhat stronger dollar and higher risk spreads, does
represent some tightening of financial conditions.
“Now, in and of itself, it’s not the end of story in terms
of our policy, because we have to put a lot of different pieces

“We are working very closely with the House Financial
Services Committee that’s requested information to satisfy their
request. We’re working very closely with them.”

“So we are envisioning further improvements in the housing
market. It remains very depressed – housing starts below levels
that seem consistent with underlying demographics, especially in
an economy that’s creating jobs. And we had lots of people who
are still doubled up, and demand for housing should be there and
should materialize as the job market improves and income growth
“So are we counting on it? Housing is now a very small
sector of the economy. It is not the driver – it is not the key
driver in my own forecast of ongoing improvements in the U.S.
economy. It plays a supporting role, but consumer spending is
the main driver, bolstered by a decent outlook for investment
spending. But I would continue to expect housing to improve.
“And remember, we’re envisioning – if things go as we
anticipate – a pretty gradual path of increases in short-term
interest rates over time to some extent that’s already embodied
in longer-term rates.”

“Our normalization principles indicated that we would not
begin to either reduce or eliminate investments until after we
have begun to raise the federal funds rate. Our principles said
that the exact timing of that would depend on economic and
financial conditions and our evaluation of them.
“And that guidance continues to be accurate. We don’t have
anything further on it. But it is certainly true that we have
committed to wait to begin running down our balance sheet until
after we’ve begun the process of normalization.
“So yes, if we defer.. This is not a very large matter that
we’re talking about from a stimulus point of view, but it is to
some extent true that if we delay raising the rate it probably,
maybe, delays the timing at which that process will begin. But
there’s no fixed — we’ve not given some fixed amount of time
and so many months after we start, and we’re continuing to
discuss what the appropriate timing would be of that policy and
haven’t made any further decisions on that just yet.

“Well it played absolutely no role in our decision. I
believe it’s the responsibility of Congress to pass a budget to
fund the government, to deal with the debt ceiling so that
America pays its bills. We have a good recovery in place that’s
really making progress and to see Congress take actions that
would endanger that progress, I think that would be more than
unfortunate. So to me that’s Congress’ job. Congress charged us
with forming an economic outlook that is focused on the
medium-term and taking appropriate policy actions based on that
outlook and that’s what we have done in the past and will
continue to do going forward.”

“The recovery from the Great Recession has advanced
sufficiently far, and domestic spending is sufficiently robust,
that an argument can be made for a rise in interest rates at
this time. We discussed this possibility at our meeting.
However, in light of the heightened uncertainty abroad, and the
slightly softer expected path of inflation, the committee judged
it appropriate to wait for more evidence including some further
improvement in the labor market to bolster its confidence that
inflation will rise to 2 percent in the medium term.”

“I continue and the committee continues to expect that
inflation will move back to 2 percent… So that bolsters my
confidence in inflation.”

“The recovery from the Great Recession has advanced
sufficiently far, and domestic spending appears sufficiently
robust, that an argument can be made for a rise in interest
rates at this time.
“We discussed this possibility at our meeting. However, in
light of the heightened uncertainties abroad and the slightly
softer expected path for inflation, the committee judged it
appropriate to wait for more evidence, including some further
improvement in the labor market, to bolster its confidence that
inflation will rise to 2 percent in the medium term.
“Now, I do not want to overplay the implications of these
recent developments, which have not fundamentally altered our
“The economy has been performing well. And we expect it to
continue to do so.
“As I noted earlier, it remains the case that the timing of
the initial increase in the federal funds rate will depend on
the committee’s assessment of the implications of incoming
information for the economic outlook. To be clear, our decision
will not hinge on any particular data release or on day-to-day
movements in financial markets. Instead, the decision will
depend on a wide range of economic and financial indicators and
our assessment of their cumulative implications for actual and
expected progress toward our objectives.”

“Of course there will always be uncertainty. We can’t expect
that uncertainty to be fully resolved.
“But in light of the developments that we have seen and the
impacts on financial markets, we want to take a little bit more
time to evaluate the likely impacts on the United States. And as
I mentioned, the inflation outlook has softened slightly. We’ve
had some further developments, namely, lower oil prices and a
further appreciation of the dollar that have put some downward
pressure in the near term on inflation.
“Now, we fully expect those further effects, like the
earlier moves in the dollar and in oil prices to be transitory.
But there is a little bit of downward pressure on inflation. And
we would like to see some further developments. And this
importantly could include – is likely to include further
improvements in the labor market that would bolster our
confidence that inflation will move back to 2 percent over the
medium term.”

“So as I’ve said before, every meeting is a live meeting
where the committee can make a decision to move to change our
target for the federal funds rate. That certainly includes
October. As you know and I’ve stressed previously, were we to
decide to do that, we would call a press briefing, and you’ve
participated in an exercise to make sure that you would know how
to participate in that press briefing, should it happen.
“So yes, October remains a possibility.”

“As I said, although we’re close to many participants and
the median estimate of the longer-run normal rate of
unemployment, at least my own judgment – and this has been true
for a long time – is that there are additional margins of slack,
particularly relating to very high levels of part-time
involuntary employment, and labor force participation that
suggests that at least to some extent the standard unemployment
rate understates the degree of slack in the labor market.
“But we are getting closer. The labor market has improved.
And as I’ve said in the past we don’t want to wait until we’ve
fully met both of our objectives to begin the process of
tightening policy given the lags in the operation of monetary

“Let me again emphasize that the specific timing of the
initial increase in the target range for the federal funds rate
is far less important for the economy than the entire expected
path of interest rates. And once we begin to remove policy
accommodation, we continue to expect that economic conditions
will evolve in a manner that will warrant only gradual increases
in the target federal funds rate.”

“You know, I want to emphasize, domestic developments have
been strong. We see domestic demand growing at a solid pace, the
labor market continuing to improve. Of course, we will watch
incoming data to confirm our expectation that that will
continue. And we of course will watch global financial and
economic developments.”

“The outlook abroad appears to have become more uncertain of
late and heightened concerns about growth in China and other
emerging market economies have led to notable volatility in
financial markets. Developments since our July meeting —
including the drop in equity prices, the further appreciation of
the dollar, and a widening in risk spreads — have tightened
overall financial conditions to some extent.”
“Given the significant economic and financial
inter-connections between the United States and the rest of the
world, the situation abroad bears close watching.”

“Inflation has continued to run below our 2 percent
objective, partly reflecting declines in energy and import
“My colleagues and I continue to expect that the effects of
these factors on inflation will be transitory.
“However, the recent additional decline in oil prices and
further appreciation of the dollar mean that it will take a bit
more time for these effects to fully dissipate.”

“Net exports were a substantial drag on net GDP growth
during the first half of the year reflecting the earlier
appreciation of the dollar and weaker foreign demand. The
committee continues to expect the moderate pace of overall GDP
growth even though restraint from net exports is likely to
persist for a time.
“The labor market has shown further progress so far this
year toward our objective of maximum employment. Over the past
three months, job gains average 220,000 per month. The
unemployment rate at 5.1 percent in August was down four-tenths
of a percent from the latest reading available at the time of
our June meeting, although that decline was accompanied by some
reduction in the labor force participation rate over the same

“Inflation however has continued to run below our longer-run
objective, partly reflecting declines in energy and import
prices. While we still expect the downward pressure on inflation
from these factors will fade over time, recent global economic
and financial developments are likely to put further downward
pressure on inflation in the near term. These developments may
also restrain U.S. activity somewhat, but have not led at this
point to a significant change in the committee’s outlook for the
U.S. economy.”

“The unemployment rate has declined and overall labor market
conditions have continued to improve. Inflation, however, has
continued to run below our longer-run objective, partly
reflecting declines in energy and import prices.
“While we still expect that the downward pressure on
inflation from these factors will fade over time, recent global
economic and financial developments are likely to put further
downward pressure on inflation in the near term. These
developments may also restrain U.S. activities somewhat, but
have not led at this point to a significant change in the
committee’s outlook for the U.S. economy.”


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