Sunday, October 26, 2014

FOMC: End of QE3, Shorter Statement

by Calculated Risk on 10/26/2014 11:16:00 AM

Earlier I posted FOMC statement previews from Goldman Sachs and Merrill Lynch economists. Here is what I expect on Wednesday:

• The FOMC will announce the end of QE3.

• The FOMC statement will be shorter. Here is the September statement (895 words). Last year, in September 2013, the statement had 798 words. Ten years ago, in September 2004, the statement had only 277 words.

• Since there is no press conference following the FOMC meeting this month, I don't expect any major changes to the FOMC statement - just the elimination of certain sections, and some wording changes.

• Possible wording changes include:

1) some upgrade to "significant underutilization of labor resources",

2) some concern about less inflation, perhaps changing the word "diminished" in the phrase "the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year" to "increased recently". Note: Earlier this year, when inflation picked up a little, Yellen said: "The CPI index has been a bit on the high side, but I think the data that we’re seeing is noisy." So the FOMC might be patient on inflation again and wait until December to make any wording changes.

3) The "considerable time" phrase will probably remain (although the sentence might be tweaked).

"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."
emphasis added

Note: I don't expect any change to this key sentence: "The Committee 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."

The over/under on the word count is probably around 800 words, and I'll take the under!

For some general thoughts on the QE, see: A Few Comments on QE