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FOMC Statement Still Says Rates Will Remain Low for a “Considerable Time”

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FOMC Statement Still Says Rates Will Remain Low for a “Considerable Time”

The sixth scheduled FOMC meeting of the year ended today, and the Fed continues to believe rates should remain low for a "considerable time" after its bond buying program (aka QE3) ends. This forward guidance on interest rates remains the same. There was speculation before the meeting that the Fed would be dropping the words "considerable time". That would have been good news for savers since it would have suggested a rate hike a little earlier in 2015. Based on today’s meeting, the Fed rate hike doesn’t look likely before the second half of 2015.

Another thing that suggests the Fed will delay its first rate hike is today’s inflation news. The Labor Department released consumer price index (CPI) data for August, and the CPI actually fell in August, "the first monthly decline for the inflation measure since April 2013" according to the Wall Street Journal. You can see how inflation factors into the Fed’s forward guidance in the following excerpt from the FOMC statement:

The Committee continues to anticipate, based on its assessment of these factors, 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, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

The only good news that can be seen in the FOMC statement is that there were more votes against the monetary policy action. Two of the inflation hawks basically disagreed with the forward guidance and the "considerable time" wording. Below is an excerpt from the FOMC statement which describes the reason for these votes:

Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser objected to the guidance indicating 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," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.

Since the inflation hawks are outnumbered by the inflation doves at the Fed, these hawks probably won’t have much effect in speeding up rate hikes.

In addition to the statement, the FOMC published a summary of economic projections. The sooner the economy improves, the sooner interest rates will rise. So we want to see revisions in the projections showing this improvement. This was seen in the unemployment rate projections which were revised down. However, the GDP projections were revised down and the inflation projections were mostly unchanged.

The projections also include the date of the first rate hike. In July, there were 12 members expecting a rate increase in 2015 and three members expecting a rate increase in 2016. In the latest projections, 14 members are expecting a rate increase in 2015 and two members are expecting a rate increase in 2016. It’s a slight change in the right direction for savers.

Chairwoman Janet Yellen gave a press conference this afternoon, and one noteworthy thing she said was that "it could take until the end of the decade" to shrink the Fed's massive balance sheet to normal levels. That reduction probably won’t even begin until the Fed starts to hike rates. Although rates could be raised quicker than the reduction of the balance sheet, it reminds us that the the Fed may be slow with not only the first rate hike but with additional rate hikes. So even if the first rate hike comes in mid 2015, it could still take several years before the Fed funds rate reaches the level we saw back in 2007.

Future FOMC Meetings

The next two FOMC meetings are scheduled for October 28-29 and December 16-17. The December meeting will include the summary of economic projections and a press conference by Chairwoman Yellen.

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Comments
Anonymous
Anonymous   |     |   Comment #1
Yellen: "it could take until the end of the decade" to shrink the Fed's massive balance sheet to normal levels.

Thus no significant rate hikes until 2019. A few basis points perhaps beginning mid-2015 but nothing special. Savers will be receiving yields in the 2-3% yield range for the foreseeable future on longer term certificates.
Anonymous
Anonymous   |     |   Comment #2
The Fed itself projects below 3% growth for the next few years. Wage growth is stagnant. Measured inflation (their method not mine) is below 2%. With all the easy money one would think the economy would be on fire. It's not even close. Ergo, NO RATE increase until the fear of an overly exuberant stock market convince them that a little crash is better than a big one. Am I the only one noticing Fed officials commenting about the stock market, something that's not in their sphere of responsibility? I think not. Smile, Janet.
Anonymous
Anonymous   |     |   Comment #3
actually 2 or 3 years ago(can't remember exactly when) Bernanke said he was targeting the stock market
Anonymous
Anonymous   |     |   Comment #4
You are correct #3. Bernanke sure did. It's called punish the prudent savers and inflate the stock market. Yellen will continue that policy as long as possible.
Anonymous
Anonymous   |     |   Comment #5
The House approved a bill to audit the Fed. Now interest rates will really be interesting.
henry
henry (anonymous)   |     |   Comment #8
people need to realize that "safe" investments like cash are more risky than they thought
Anonymous
Anonymous   |     |   Comment #12
Cash is never risky.
henry
henry (anonymous)   |     |   Comment #13
To #12, have you ever looked at periods where short-term treasuries have lost a lot of money in real terms? 

Have you charted a money market compared to inflation since 2008? (purchasing power losses!!)

How can you say cash is never risky?
Anonymous
Anonymous   |     |   Comment #16
Because, and especially for people who are retired, it’s essential to keep money in liquid, easy-to-access investments that are not subject to marketplace swings or losses. Such investments include checking, savings, and mma's, but also cold, hard cash.
jeff
jeff (anonymous)   |     |   Comment #19
also essential for retirees to keep up with inflation, which cash is poor at doing
Anonymous
Anonymous   |     |   Comment #20
That depends on how much cash one has, what the local cost of living is and one's fixed total monthly outlay vs expenses. With interest from savings in six figures+ social security+pension we have managed quite nicely for the past 15 years. Inflation has been nonexistent and unless one is a terrible money manager, life is good.
Anonymous
Anonymous   |     |   Comment #32
Inflation has been nonexistent?  You have been listening to the Fed's way too much.  Good to hear life is good for you but for the masses it is truly the opposite when it comes to finances.  Have a heart!
Anonymous
Anonymous   |     |   Comment #33
Inflation is existent for most but not all!  If one is debt free, drives an older car, does not travel too much (or only when the price is down...some of us go when the price of gas is up, i.e. fewer people on the roads!), watches the food budget, etc. the impact from inflation is minimal notwithstanding any published/perceived notion!  Live in a cheaper area of the country and...plan accordingly!
Anonymous
Anonymous   |     |   Comment #6
For a few years we have been at the crossroads where a manipulated economy meets partisan politics. As long as the financial markets are artificially supported, it gives political advantage to the incumbent party. If the fed doesn't normalize rates by 2016, the first fed chairwoman can be credited for influencing the election in favor of the first woman president.
henry
henry (anonymous)   |     |   Comment #7
at some point, people need to realize that all-cash portfolios is a bad idea. just to have 20% in equities can make a huge difference and is better diversified.
Anonymous
Anonymous   |     |   Comment #9
It can make a huge difference in one of two directions...up or down. I never assume all equity investments move to the upside. Also, age, income stream(s), pensions, etc. all factor in to the ultimate equation. Interestingly, every bull market ends on a slew of buy recommendations based on nothing more than, "the market is the place to be."  Probably true if you're young but past 60 I'd think again and again and again. At some point...cash is king.
jeff
jeff (anonymous)   |     |   Comment #14
at some point cash is king yes, but over the long term cash is riskiest of them all
Anonymous
Anonymous   |     |   Comment #10
Interest rate "have to go down" since that is one of the main ingredients to kick start the economy.  If the rates do not go south "soon," there will be fewer tools in the Feds tool box....that is the main rationale now for the Fed.  Thus, if no short term risk of an economic "slide" there is no hurry, from its perspective, to raise rates. 
Anonymous
Anonymous   |     |   Comment #21
Those in all cash have missed the train again...
The Dow closed up 108 points, 0.6%, and ended at a new all-time high of 17,265. It was the fourth straight day of gains for the blue-chip index. The S&P 500 added 10 points, 0.5%, and closed at a record-high 2011. The tech-laden Nasdaq composite index finished up 31 points, 0.6%, to end at 4593. Stocks got a boost when markets breathed a sigh of relief after the Fed said Wednesday it plans to keep rates low for "a considerable time" after it ends its bond-buying program next month. Investors have been anxious that interest-rate hikes may be coming sooner than previously anticipated.
Anonymous
Anonymous   |     |   Comment #24
people were saying it was too high at Dow 11,000 (due to perhaps fears of rising interest rates)

oops, guess they forgot to do long-term thinking
Anonymous
Anonymous   |     |   Comment #26
It's not a train and no one "missed" it. This is the kind of logic that drove small investors into making stupid moves and, in the process, losing a great deal of wealth. When the Fed starts tightening look out below. I know, I know, everyone will get out before the downturn because everyone is so smart. I have a 62 year old friend who wants to make up for his "lost years" of investing. A few weeks ago while on vacation he panicked for two days because his Internet connection was down and he feared a margin call. Some life that is at 62. Check margin debt for an insight to risky behavior.
henry
henry (anonymous)   |     |   Comment #27
To #26: The Fed has already started tightening when they began Taper. Result? New all-time highs.

And the only way people lost a great deal of wealth was selling when things were going down. So it wasn't the market that caused losses, but rather individual behaviour and lack of patience and lack of long-term thinking.
Anonymous
Anonymous   |     |   Comment #28
Do you have any idea how much wealth is stuck in 401K's and managed IRA's, money that cannot simply be transferred on a whim because it's wrapped up in equities, bonds, etc. under someone else's control? These "managed funds" are not under the control of the owner except for periodic allocations. And, it's the owner that loses wealth in a crash, not the advisor/manager. I know people who went to 100% cash in their managed 401K's before the last two crashes and then came back in at or near the subsequent lows. They did not time the market but rather read the newspaper and then made the allocations via their company plan...when they were allowed. Two are multi-millionaires as a result of basic education, prudence and FEAR that the party could not continue. Most people went to work trusting in the 401K system and lost wealth accordingly. The cycle will, as always, continue.

PS
Wealth is lost by not selling high and then, after the blood letting, buying low.
Hoody
Hoody   |     |   Comment #22
imore stuff for thought, young or old ...
------------------------------------------------


"nfamous short-seller Bill Fleckenstein left a CNBC anchor questioning her faith in the status quo in this brief interview. As she pestered him with questions about 'missing out on the rally', Fleckenstein snapped back "so what? I don't care, it doesn't matter" asking rhetorically "when the market declines, how fast will it all be taken away from you?" Fleckenstein warned "I don't think we will get through October without some accident," adding that "the stock market is more crash-prone than ever." When pressed again about sitting on the sidelines, Fleckenstein rebukes, "if you want to pursue idiots like the Fed doing crazy policies, and if you think you can get out in time, go for it. I don't want to try to do that.""
cdbuyer
cdbuyer   |     |   Comment #11
I find it interesting that everyone is focusing on the fact that the Fed intends to keep the federal funds rate at near zero for "a considerable time" but is not giving similar emphasis to the fact that the Fed's bond buying program (i.e., QE) is coming to an end.  Keeping the federal funds rate low should affect primarily short term interest rates but, before QE came into existence, longer term interest rates were affected primarily by market forces.  QE changed that because the Fed was manipulating the longer term market by becoming a big buyer in that market and thereby driving up the prices of govt bonds and thus moving the longer term interest rates down.  With that bond buying program now ending and the Fed thus exiting as a big buyer in the market, it would seem to me that prices of govt bonds should have downward pressure and interest rates should then have upward pressure, all of which should be good for interest rates on CDs despite the "considerable time" language with regard to the low short term federal funds rate.  Note that the 10-year rate today is up over 2.6% and even the 5-year note is almost at 1.85%.  Why does this all not suggest that there should be upward pressure on the market for long-term interest rates, such as 5-year or longer CDs, despite the low short-term federal funds rate?  Even if the Fed delays selling the bonds it already owns for some period of time, the fact that it will not be buying additional bonds would seem bullish for longer term interest rates.    What am I missing?
Anonymous
Anonymous   |     |   Comment #15
What you are missing is that your argument is logical whereas the Fed is political. 
Anonymous
Anonymous   |     |   Comment #17
“Many hold the misconception in this country that China is the world’s largest owner of U.S. debt. That is not true.  In fact, the Federal Reserve’s balance sheet shows the Federal Reserve itself is by far the largest holder of U.S. Treasury bonds. With more than $2.2 trillion in Treasury debt, the Fed holds nearly $900 billion more than China does, if you can think in those terms. The Fed holds more in Treasury bonds than do China and most of the Eurozone combined."

http://cnsnews.com/news/article/terence-p-jeffrey/fed-owns-64-more-us-government-debt-china
Anonymous
Anonymous   |     |   Comment #18
The world is flooded in money, everyone already printed or still printing, like Japan and EU, money is no longer needed by any country and therefore nobody buy large blocks of the US treasuries and therefore low interest rates continue even after the FED money stopped.
Anonymous
Anonymous   |     |   Comment #23
what are you talking about? treasury yields are near record low = very high demand = lots are buying
Anonymous
Anonymous   |     |   Comment #25
You have it wrong..... if the sales of treasuries were down, yields would rise.
Hoody
Hoody   |     |   Comment #29
Any more questions from the markeeteers?
----------------------------------------------------------------

"FOMC voting-member Richard Fisher is among the sanest voices in the Eccles Building asylum and he is once again sounding alarms that all is not well in US financial markets:
  • *FISHER SAYS FED HAS 'LEVITATED' MARKETS
  • *FISHER SAYS HE SEES SIGNS OF EXCESS IN FINANCIAL MARKETS
Furthermore, Fisher notes The Fed can't force companies to hire, and would like to see rate hikes as early as Spring 2015."
Anonymous
Anonymous   |     |   Comment #30
Fisher; one of the few adults in the room.
Anonymous
Anonymous   |     |   Comment #31
They're talking their book.... you have a couple fed officials that come out and say rates should rise, then the market drops a little and then a couple different fed members come out and say we shouldn't raise rates and so on and so on.  Do you really think Yellin is going to raise rates?  She keeps saying no but people aren't listening to her, people just want to hear what they want to hear. The only way I see rates rising is if the bond market decides to do it and so far it doesn't look good.