Sunday, March 15, 2015

FOMC Preview: Remove "Patient"

by Bill McBride on 3/15/2015 11:08:00 AM

The FOMC will meet on Tuesday and Wednesday. The FOMC statement will be released Wednesday at 2:00 PM ET.  Fed Chair Janet Yellen will hold a press conference at 2:30 PM. Here is what I expect on Wednesday:

• The initial focus will be on the word "patient" in the FOMC statement. From the January statement:

"Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy."
It seems very likely "patient" will be removed on Wednesday.

• How the FOMC discusses inflation will also be important since inflation has declined sharply and is well below the FOMC 2% target. My guess is these sentences will remain about the same, but the FOMC could express more concern about low inflation:
"Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.
...
Inflation is anticipated to decline further 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 lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely."
• The key focus will be on Fed Chair Janet Yellen's press conference and the FOMC projections.

• The following paragraph from Fed Chair Janet Yellen's testimony on February 24th seemed to suggest "patient" would be dropped from the FOMC statement at the meeting this week. Sentence by sentence from her testimony:
The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.
That just repeated the previous understanding. If the FOMC wants to have the option to raise rates in June, they would most likely drop "patient" from the statement in March (June is the second meeting after March).
If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance.
Yes, the FOMC needs to drop "patient" before they move to a meeting-by-meeting basis.
However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings.
This was an important clarification.

My guess is Yellen will reiterate that dropping "patient" does not mean a rate hike is guaranteed two meetings later - just that a hike may be considered based on incoming data (employment and inflation).  She will also state that the first rate hike will be data dependent.

• It will also be interesting to see the changes to the FOMC projections.  For review, here are the previous projections.   GDP is looking weak in Q1, and it is possible GDP projections for 2015 will be decreased slightly.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in
Real GDP1
201520162017
Dec 2014 Meeting Projections2.6 to 3.02.5 to 3.02.3 to 2.5
Sept 2014 Meeting Projections2.6 to 3.02.6 to 2.92.3 to 2.5
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate was at 5.5% in February, so the unemployment rate projection for Q4 2015 might be lowered slightly. 

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment
Rate2
201520162017
Dec 2014 Meeting Projections5.2 to 5.35.0 to 5.24.9 to 5.3
Sept 2014 Meeting Projections5.4 to 5.65.1 to 5.44.9 to 5.3
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

As of January, PCE inflation was up only 0.2% from January 2014, and core inflation was up 1.3%.   PCE inflation will probably be revised down for 2014, and will be well below the FOMC's 2% target.   A key will be projections for 2016 and 2017.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE
Inflation1
201520162017
Dec 2014 Meeting Projections1.0 to 1.61.7 to 2.01.9 to 2.0
Sept 2014 Meeting Projections1.6 to 1.91.7 to 2.01.9 to 2.0

PCE core inflation was up only 1.3% in January.  A key will be if PCE core inflation is revised down for 2014 in the projections.

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core
Inflation1
201520162017
Dec 2014 Meeting Projections1.5 to 1.81.7 to 2.01.8 to 2.0
Sept 2014 Meeting Projections1.6 to 1.91.8 to 2.01.9 to 2.0