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Updated: Federal Reserve Maintains Forward Guidance Language

By Kitco News
Wednesday September 17, 2014 2:00 PM

Editor's Note: The article was updated to include more information from Federal Reserve Projections. The article will updated regularly during Fed Chair Janet Yellen's press conference.

(Kitco News) - The Federal Reserve continues to move ahead with its exit strategy, shaving another $10 billion from its monthly bond-purchase program; however, it has opted to leave its forward guidance in its monetary policy statement unchanged.

In a surprising move for some analysts and economist, the central bank has left the key phrase “for a considerable time” unchanged in its monetary policy statement.

Following the two-day Federal Open Market Committee meeting, the central bank reduced its monthly quantitative easing program to $15 billion, shrinking its purchases of mortgage backed-securities to $5 billion from $10 billion and its long-term Treasury securities purchase to $10 billon, from $15 billion.

During her press conference, Fed Chair Janet Yellen said that the exit is on track for the central bank to end its purchase program to end at the next meeting in October.

According to the monetary policy statement, the committee also remains optimistic on the U.S. economy saying that activity is expanding at a “moderate pace.”

The Fed’s forward guidance has been the subject of intense focus recently, with some analysts expecting a change in the statement, as the central bank had a fairly optimistic outlook of the country’s economic growth.

However, there has been no clear consensus and speculation that there would be no change as late as Wednesday morning following a much weaker-than-expected consumer price index report. According to the Labor Department, consumer price pressures fell 0.2% in August, below expectations of a 0.1% rise.

Annualized inflation dropped to 1.7%, compared to July’s increase of 2.0%. Annualized core inflation also dropped to 1.7%, below the Fed’s target of 2.0%.

Fed Committee Hasn't Seen Enough Change In Economy To Update Forward Guidence

During the question and answer portion of her press conference, Yellen said that during the committee's discussion, the members thought it was appropriate to keep the "considerable time" reference because the outlook hasn't change significantly since June.

Yellen continued to reaffirm that the Fed's stance is data dependant; she said the "considerable time" reference is not based on any calendar time-frame, but is based on the committee's assessment of the economic data.

Commenting about the labor market, Yellen also reiterated that there is a still a significant underutilization of labor resources and that is helping to keep inflation expectations lower.

Commenting on the Fed’s extensive balance sheet, Yellen said that the committee wants to wait until the normalization process is underway before they stop reinvesting process.

She added that it could take until the “the end of the decade” before the Fed’s balance sheet is reduced to an appropriate level. She also said that its reduce balance sheet could still be slightly higher compared to previous normal levels.

Yellen also address the lack of inflation in Europe, saying that it is another risk to the global economy and that the Federal Reserve hopes the measures the European Central Bank have taken will help to reinflate the eurozone economy.

Fed Economic Projections

Along with its monetary policy statement the central bank also released its updated economic projections. According to projections, the Fed has raised its estimates for the fed funds rate and is now expecting rates to hit 1.23% in 2015, up from the previous expectations of 1.20%. Rates are also expected to rise to 2.55% in 2016, an increase from precious forecast of 2.50%.

September also includes projections to 2017, with expectations that rates will average 3.79% for the year.

The Federal Reserve has once again lowered its estimates of economic activity in 2014 and 2015. The central bank expects gross domestic product to expand between 2.0% to 2.2% this year, down from June’s projections of 2.1% to 2.3%; for 2015, GDP is expected to grow between 2.6% to 3.0%, down from previous projections of 3.0% to 3.2%. Looking further out, the fed is slightly more optimistic, as they expect 2016 GDP to grow between 2.6% to 2.9%, up from the June forecast of 2.5% to 3.0%. Finally for 2017 the central bank expects the economy to expand between 2.3% to 2.5%.

On the employment front, the Fed has also become more optimistic. For 2014, they expect the unemployment rate to be between 5.9% and 6.0%, down from June projections of 6.0 to 6.1%; in 2015 they expect the unemployment rate to drop between 5.4% and 5.6%, down from June’s forecast of 5.4% to 5.7%. For 2016 unemployment is expected to drop between 5.1% and 5.4%, down only slightly from the precious forecast of 5.1% to 5.5%. Finally for 2017, the unemployment rate could drop below 5% and come in between 4.9% and 5.3%.

On Inflation, the central bank is expecting price pressures to remain subdued until 2016, relatively in line with their precious forecast. For 2014 the Fed expects core personal consumption expenditure to grow between 1.5 and to 1.6%, unchanged from June; for 2015, they expect core inflation to grow 1.6% to 1.9%, slightly down from June’s forecast between 1.6% and 2.0%; for 2016, they expect core inflation to rise between 1.8% and 2.0%, up slightly from June’s forecast of 1.7% to 2.0%. For 2017, the central bank expects core inflation to rise between 1.9% and 2.0%.

The vote for September's monetary policy statance was not unanimous. Both Richard Fisher, Dallas Fed President and Philadelphia Fed Preseident Charles Plosser voted aginst the action.

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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