Today’s (Jan. 27) Federal Open Market Committee’s statement following its January meeting may have been the least anticipated FOMC statement in many years. The Fed had already tightened rates for the first time in a decade at its last meeting and there was no anticipation of another move until, at the very earliest, its March meeting.
The main question analysts were asking was if the Fed Governors would tip their hand at all. I was interested to see if they would comment on the recent global equity weakness and the collapse in energy. They did not mention that in any meaningful way. The statement did attribute the lack of measured inflation to “further declines in energy prices,” but repeated its expectation for inflation to “rise to 2% over the medium term as the transitory effects of declines in energy and import prices dissipate.”
I don’t know how the Fed measures medium-term but here is a quote from its Jan. 28, 2015 statement: “the Committee expects inflation to rise gradually toward 2% over the medium term.”
After their Jan. 29, 2014 meeting they noted: The Committee … is monitoring inflation developments carefully for evidence that inflation will move back toward its objective (2%) over the medium term.”
They didn’t expect it to reach 2% at the beginning of 2014, and used that lack of inflation as a reason it would not raise interest rates despite the unemployment rate (6.7% at the time) getting close to the level it had previously set (6.5%) as a threshold for raising rates.
Wednesday’s announcement had virtually no mention of the worst equity performance start to a year on record. The closest it came was this: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation.”
This is important because the one time the Fed appeared to blink over the last few years is when they held off tightening in September 2015, alluding to events in China as a contributing factor with this comment: “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.”
The rest was predictable. What does it mean?
Well the Fed remains data dependent but expect a gradual increase in rates throughout 2016. Chair Yellen has pointed out on multiple occasions that she does not want the Fed to be as predictable as it was during its last tightening cycle. She proved during the Fed’s tapering phase that minor (and not so minor) blips in economic data are not going to push the Fed off course. While it took a while, once the Fed began tapering its bond purchases that were part of QE3, it stayed the course despite some soft employment numbers.
Equity markets sold off sharply after the announcement (see chart below). If there was an expectation that the Fed was going to reassure equity traders that they had their backs, it didn’t come. That is healthy, and about time.