Redacted Version Of The December 2015 FOMC Statement

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Redacted Version Of The December 2015 FOMC Statement
After 9 years the Fed finally raised interest rates. Fed Chair Yellen took the historic step after her predecessor, Ben Bernanke, lowered rates to 0% during the depths of the 2008 global financial crisis.

Redacted Version Of The December 2015 FOMC Statement by David Merkel, The Aleph Blog

October 2015 December 2015 Comments
Information received since the FOMC met in September suggests that economic activity has been expanding at a moderate pace. Information received since the FOMC met in October suggests that economic activity has been expanding at a moderate pace. No change.
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. 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. No change.
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. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Shades labor employment up.
Inflation has continued to run below FOMC’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Inflation has continued to run below FOMC’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. No real change.
Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down. Little change and mixed.  TIPS are showing lower inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 1.71%, down 0.08% from September.
Consistent with its statutory mandate, FOMC seeks to foster maximum employment and price stability. Consistent with its statutory mandate, FOMC seeks to foster maximum employment and price stability. No change. Any time they mention the “statutory mandate,” it is to excuse bad policy.
FOMC expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels FOMC judges consistent with its dual mandate. FOMC currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Shifts language to reflect moving from easing to tightening.
FOMC 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. Overall, taking into account domestic and international developments, FOMC sees the risks to the outlook for both economic activity and the labor market as balanced. Flips the sentence around with little change in meaning.
Inflation is anticipated to remain near its recent low level in the near term but FOMC 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. FOMC continues to monitor inflation developments closely. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. FOMC continues to monitor inflation developments closely. CPI is at +0.4% now, yoy.  Not much change in the meaning.
FOMC 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. FOMC judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Sentence moved from below.  I reordered the last FOMC Statement to reflect the change.

Language changes to reflect the move to tightening.

To support continued progress toward maximum employment and price stability, FOMC today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. Language changes to reflect the move to tightening.
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. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. Language changes to reflect the move to tightening.
In determining the timing and size of future adjustments to the target range for the federal funds rate, FOMC will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. New sentence.  Gives expected measures for analysis of policy.
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. 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. No change.  Gives the FOMC flexibility in decision-making, because they really don’t know what matters, and whether they can truly do anything with monetary policy.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. FOMC expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. New sentence.  Says that they will go slowly, and react to new data.  Big surprises, those.
FOMC 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 FOMC ’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. FOMC 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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Says it will keep reinvesting maturing proceeds of agency debt and MBS, which blunts any tightening.
When FOMC 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. FOMC 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. Sentence no longer needed.
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 for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. All agree on tightening, but do they agree on why?
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. Lacker got what he wanted.

Comments

  • They finally tightened. The next two questions are how much and how quickly.  The last question is what they do when something blows up.
  • The only data change for the FOMC is that labor indicators are stronger. I still don’t see it, aside from the unemployment rate.  Too many people dropped out of the labor force.
  • Equities steady and bonds rise. Commodity prices rise and the dollar falls.  Maybe some expected a bigger move.
  • The FOMC says that any future change to policy is contingent on almost everything.
  • Don’t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
  • The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain’t moving rates up, absent improvement in labor market indicators, much higher inflation, or a US Dollar crisis.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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