FOMC Left ‘Considerable Time’ Language But Generally Viewed As More Hawkish

Market reactions suggested that investors viewed the September FOMC meeting as a hawkish one although the Fed retained the language that ‘it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends’. Treasury yields and the US dollar climbed higher as fed funds ‘dot plot’ moved higher. Meanwhile, the Fed continued QE tapering and announced a further US$10B reduction in asset purchases. On the accompanying statement, it is stated clearly that the asset purchase program would end at its next meeting.

Despite improvements in economic activities, policymakers remained concerned about the slack in the labour market. At the press conference, Fed Chair Janet Yellen indicated that ‘the labor market has yet to fully recover’ and ‘there are still too many people who want jobs but can’t find them’. In the policy statement, it was also noted that ‘there remains significant underutilization of labor resources’. In response to the soft August inflation date, the Yellen noted that ‘inflation has been running below the Committee’s 2% objective’. This was compared with the reference in July’s statement that inflation was ‘somewhat closer’ to its goal.

The Fed’s latest set of economic projection showed somehow downward revision on the growth outlook. GDP growth is revised to 2- 2.2% in 2014 from 2.1%- 2.3% in June’s projection. For 2015, growth probably comes in between 2.6-3%, down from June’s forecast, while 2016 growth is seen at 2.6-2.9%. In the longer run, the Fed expects growth to stand 2- 2.3% (from 2.1-2.3% in June). On a positive note, the Fed now expects unemployment rate to be around 5.9%-6.0% in late 2014, down from 6-6.1% in June. In the longer run, the Fed forecast unemployment rate would stay at 4.9-5.3% in 2017, compared with June’s forecast of 5.2-5.5%. Inflation was forecast to stay at 1.5-1.7% in 2014. The Fed also introduced the long-term projection of inflation at 1.9-2%.

The mildly lower growth outlook did not tamper the expectations of an earlier rate hike schedule with the members raising their median estimate for the Fed funds rate, as the dot plot shows, to 1.375% at the end of 2015 from 1.125% forecasted in June. The median funds rate is expected to reach 2.875% and 3.75% in 2016 and 2017 respectively. Indeed, we believe that the Fed would like to use the language that ‘it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends’ to play down the significance of the dot plots, and hence rate hike expectations of the market. In the press conference that‚ Yellen indicated that there is relatively little upward movement in the (federal funds rate) path’.

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