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.