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Fed Note - December 17, 2014

Fed Note - December 17, 2014

Guest Post - Wednesday, December 17, 2014

The FOMC finished their final meeting of the year today, and offered no substantive changes now that the taper has already completed and there isn't much to tweak—other than raise interest rates, which they didn't do (no rate increases were expected)

The part being most closely watched now is the language, notably the potential removal of 'considerable time' from the official statement—which was reworded a bit with a new emphasis on 'patience.' There were other adjustments, but the general spirit was dovish, even if not as dovish as previously. (The equity market reaction was strongly positive to this, implying worries about the statement being potentially more hawkish than it was.)

There were also three dissenters from the decision (albeit for three different reasons: one felt the stance was too accommodative considering the stronger economic results in recent months, one felt it wasn't not dovish enough considering the still-present risks of very low inflation, and one felt the use of any 'timing' or language based on relative comparisons to prior meetings was inappropriate).

Now for the dashboard:

Employment: Their assessment of conditions showed labor market improvement, with slightly more positive language than in October. No doubt last month's jobs report was a positive surprise, although skeptics sometimes question seasonal additions and adjustments around year-end. Other metrics, such as the JOLTs and initial jobless claims have also shown strength in recent months (albeit at a slower speed than in prior recoveries). This appears to be the final element the Fed needs to 'shore up' before more normal policy commences, barring any surprises to the downside.

Interest Rates/Inflation: The Fed Funds rate remains at the zero bound target range of 0.00-0.25%. The primary adjustment here was a lowering of FOMC member estimates for the pace of rate hikes, although the majority of members are still targeting hikes to occur in 2015. With Treasuries now yielding in the 2.1% range and the latest year-over-year CPI print this morning for November falling to 1.3%, 'real' yield has fluctuated between 0.5-1.0%, negative for the attractiveness of fixed income via that metric. FOMC members acknowledged the continued low inflation rate, but downplayed the role of energy prices, which tend to be volatile. Again, not to state the obvious, but the question becomes how much longer can the FOMC keep 'emergency'-level zero rates with the economy and employment in recovery?

General Economy: The upward revision of 3rd Quarter GDP was positive, and survey/sentiment data from the current quarter looks positive as well, at least in the U.S. (we'll keep this focused domestically, although the Fed naturally casts an eye abroad). Growth in this cycle is slower than historical trend, and arguments continue about the cause, but repair continues to progress and the slow speed may lengthen its magnitude. The dramatic drop in oil prices in recent months has mixed repercussions, but, in general, should provide more of a net benefit to the broader economy than not (think about how we'd feel if the situation were the opposite).

At this point, the indicators point to continued repair, particularly in the labor market, which has been the primary lagging component. Signs and opinions continue to point to mid-2015 as the jumping off point for rate increases, but no doubt the coming year will have as many surprises in store as have the previous few.

Enjoy the Holidays.

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