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15 Dec 2014
Is it still a “considerable time” for the Fed? – BBH
FXStreet (Barcelona) - The Brown Brothers Harriman Team observes that in terms of forward guidance, Fed’s “considerable time” phrase has had markets arguing if it has any meaning, and further notes that the absence of this phrase will raise confidence for a rate hike in mid-2015.
Key Quotes
“The key event this week is the Federal Reserve’s last meeting of the year. It will include updated macroeconomic forecasts, and will be followed by a Yellen press conference. As the Federal Reserve has done in the past, it should be expected to look largely past the deflationary implications of the decline in energy prices, and the short-run volatility in the equity market.”
“With the asset purchases over, the FOMC statement can be simpler. The economic assessment may be upgraded. The labor market has continued to improve, though not yet to acceptable levels. Inflation is not trending toward the FOMC’s target.”
“In terms of forward guidance, there are three phrases that are important. The first is the characterization of slack in the labor market. Is it still “significant”? We suspect that this phrase will be left in if the Fed adjusts the second phrase. It involves the length of time between the end of QE and the first hike. Is it still a “considerable time”?”
“Many observers have argued this phrase has largely been gutted already of any real meaning. However, its absence would raise confidence in a rate hike in the middle of next year. Recall Yellen’s faux pas at her first press conference. She veered away from strategic ambiguity to define “considerable” as around six months. Given the recognized importance of communication in this period of reliance on forward guidance, we believe that important changes in phrases and policy will be followed by the Chair’s press conference, like this week.”
Key Quotes
“The key event this week is the Federal Reserve’s last meeting of the year. It will include updated macroeconomic forecasts, and will be followed by a Yellen press conference. As the Federal Reserve has done in the past, it should be expected to look largely past the deflationary implications of the decline in energy prices, and the short-run volatility in the equity market.”
“With the asset purchases over, the FOMC statement can be simpler. The economic assessment may be upgraded. The labor market has continued to improve, though not yet to acceptable levels. Inflation is not trending toward the FOMC’s target.”
“In terms of forward guidance, there are three phrases that are important. The first is the characterization of slack in the labor market. Is it still “significant”? We suspect that this phrase will be left in if the Fed adjusts the second phrase. It involves the length of time between the end of QE and the first hike. Is it still a “considerable time”?”
“Many observers have argued this phrase has largely been gutted already of any real meaning. However, its absence would raise confidence in a rate hike in the middle of next year. Recall Yellen’s faux pas at her first press conference. She veered away from strategic ambiguity to define “considerable” as around six months. Given the recognized importance of communication in this period of reliance on forward guidance, we believe that important changes in phrases and policy will be followed by the Chair’s press conference, like this week.”