The Fed's Federal Open Market Committee released a brief statement on its decision to not raise the federal funds rate. The committee's basic analysis and conclusions are unchanged from numerous previous statements of this kind. The language sounds very familiar. For example:
Information received ... suggests that economic activity has been expanding at a moderate pace.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.
To read the analysis from the investment world, the statement is being spun as "hawkish." That a statement such as this can be defined as "hawkish" shows just how much the goal posts have been moved in recent years. This is the section that is apparently hawkish:
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Or perhaps:
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.
Apparently, statements like these point to a interest-rate raising spree in the minds of some.
But don't worry, the odds of price inflation moving spring above 2 percent in the near term continue to look weak. As Frank Shostak notes in today's Mises Daily, annual CPI growth is hovering around zero.
As Thorsten Polleit wrote in Mises Daily on Monday, the economy's weakness means the Fed is afraid to raise rates. And yet, the Fed must maintain the appearance that it will raise rates, and soon.
Will the Fed keep up appearances by experimenting with a 0.25 percent hike? It's possible, although there's no reason at this point to believe a December rate hike is a fait accompli. We were saying similar things a year ago.
The statement further says that the committee may keep " the target federal funds rate below levels the Committee views as normal in the longer run."
It's a safe bet, though, that what the committee considers to be "normal," looks like this:
If the committee gets really super hawkish, it may let the effective rate move up to 0.2 percent.
On the other hand, one doesn't have to go back to ancient times to get a totally different perspective on what might be a "normal" rate. Things looked a bit different ten years ago. Here's the same graph with a longer time frame:
Our definition of "hawkish" seems to have changed over time.
Here's the Full FOMC statement:
Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
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. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
