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Updated: Market Digesting Nuance Of Fed’s Monetary Policy Statement

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

Editor's Note: The article was updated to include more information from the report and clarifty the FOMC statement. The article was updated a second time to include comments from TD Securities.

(Kitco News) - In what seemed like a close call for financial markets, it is unclear if the Federal Open Market Committee decided to leave the key phrase “for a considerable time,” in the monetary policy statement.

This wording has been an important component of the Federal Reserve’s forward guidance policy. Currently there is some anticipation that the Fed will start raising rates in the second half of 2015.

Kitco’s Jim Wyckoff explained, “Traders and investors were still digesting Wednesday's Federal Reserve Open Market Committee statement at the conclusion of its two-day meeting. The Fed left in the words ‘considerable time’ regarding its interest rate policy and the timeframe on raising rates. That was deemed dovish. However, it had other wording that was deemed a bit more hawkish, to somewhat offset leaving in the "considerable time" wording. And many market watchers were just plain confused by what the Fed statement implied. Maybe that's what the Fed wanted: confusion until Fed members, themselves, better figure out what's going on with the U.S. economy and worldwide developments.

In the statement the committe said, "based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time..."

Eric Green, head of U.S. rates and economic research at TD Securities, described the clumsy, semantic changes in the statement as the "Fed wanting its cake and eating it too."

"What we are ultimately left with is the message that policy will be data dependent. That is not exactly brain food in a market starved for red meat. If the Fed's communication apparatus has been uneven over the past year the December effort to right the ship is left wanting," he said. "All we can say with certainty is that "considerable" will not be in the next statement, policy is data dependent."

The committee also said that since the October meeting the economic data continues to suggest that activity is expanding at a moderate pace.

The hawkish tone in the report appears to be the result of the updated economic projects. Looking at GDP growth, the Fed expects to see growth between 2.3% and 2.4% in 2014, up from September's projections of 2.0% to 2.2%. Growth expectations were unchanged for 2015 as the central bank expects to see growth between 2.6% to 3.0%, 2016 growth was relatively unchanged with the Fed expecting to see growth between 2.5% and 3.0%, compared to 2.6% to 2.9%. Finally growth projects for 2017 remained unchanged with a range between 2.3% to 2.5%.

According to the projections, the unemployment rate is expected to be 5.8% in 2014. For 2015, the unemployment rate is expected to be between 5.2% and 5.3%, down from September’s forecast of 5.4% to 5.6%. The Fed expects 2016 to see an unemployment rate between 5.0 to 5.2%, down from the previous forecast of 5.1% to 5.4% and the unemployment rate for 2017 was unchanged within a range of 4.9% to 5.3%.

Finally looking at core inflation data, the Fed left its 2014 expectations unchanged in a range between 1.5% and 1.6%. For 2015, they expect inflation to fall to between 1.5% and 1.8%, down from September’s projections of 1.6% to 1.9%. for 2016 core inflation is expected to come in between 1.7% and 2.0%, relatively unchanged from the precious forecast of 1.8% and 2.0%. For 2017, inflation is expected to hover between 1.8% and 2.0%, slightly down from the previous forecast.

Looking at the Fed’s dot plot projections, there are expectations that interest rates will be around 1.0% next year and could reach a high of 2.0%. Looking out to 2017 the majority of committee members see interest rates hovering just below 4.0%.

Avery Shenfeld, senior economist at CIBC World Markets described the report as middle of the road with something for both the hawks and the doves.

He added that the dot plot projections were slightly weaker than the previous forecast and that could change his forecast for when the central bank will actually hike rates.

“We were calling for a March hike, but will need to see at least a bit firmer wording in January. The Fed didn’t change the language on inflation expectations, but no longer use the word 'gradually' to describe the pace at which labor markets are tightening,” he said.

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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