Tapering is not tightening
"The Fed, at least so far, appears to have done a better job than last summer in anchoring expectations for short-term rates; reinforcing the notion that "tapering is not tightening." Looking at the Fed's economic outlook, there is very little chance it raises short-term rates in 2014; although two voting members believe it would be appropriate. Most of the FOMC (12 members) expect at least one hike by the end of 2015; with three members believing the first increase won't come until 2016".
"Before I get to the qualitative analysis, let's start with an analysis of the Fed's statement accompanying today's decision. One key sentence: "The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. 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."
Fed officials now predict the unemployment rate could be as low as 6.3% by the end of 2014, compared with a September projection of 6.4-6.8%. In fact, in general, the Fed's tone was relatively optimistic; removing the reference to downside risks that had been in prior statements: "The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced." The Fed also mentioned less fiscal drag: "Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing."
"The Fed, at least so far, appears to have done a better job than last summer in anchoring expectations for short-term rates; reinforcing the notion that "tapering is not tightening." Looking at the Fed's economic outlook, there is very little chance it raises short-term rates in 2014; although two voting members believe it would be appropriate. Most of the FOMC (12 members) expect at least one hike by the end of 2015; with three members believing the first increase won't come until 2016".
Before I get to the qualitative analysis, let's start with an analysis of the Fed's statement accompanying today's decision. One key sentence: "The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. 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."
Fed officials now predict the unemployment rate could be as low as 6.3% by the end of 2014, compared with a September projection of 6.4-6.8%. In fact, in general, the Fed's tone was relatively optimistic; removing the reference to downside risks that had been in prior statements: "The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced." The Fed also mentioned less fiscal drag: "Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing."
Source: Schwab, Liz Ann Sonders. Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
