[Before press conference]

There is the danger of inconstancy in the Fed’s communications. On the one hand, the language in the FOMC statement about the “considerable period” is still there, which Chair Yellen described as six months. On the other, the FOMC median expectation for fed funds at the end of 2015, which after all the FOMC controls, is for 1.375%. That rate today is about 0.10%. So that means five 0.25% increases of out eight meetings, which all adds up to the Fed’s projections are implying rates to begin to rise in June of next year. Is that a “considerable” amount of time away?

We hope we get some clarification from the press conference.

[After press conference]

With the animating spirit of Alan Greenspan obfuscating her answers, Chair Yellen allowed the ambiguity noted above to stand. My best guess is that the tension between the “considerable time” formulation and the FOMC consensus opinion on where rates should go will be resolved by how inflation (and the expectations for further inflation) move and how quickly. That is to say, the FOMC is not sure exactly when it will raise rates and wants to maintain freedom of maneuver. Our best guess is that the modest pace of economic growth and residual slack in the economy will allow rates to stay low.

There were some technical details about unwinding QE and normalizing monetary policy. The major change to what we knew before being that rates will rise before the Fed allows a passive reduction in its balance sheet by ceasing to reinvest principal and interest as it is paid.

There was a good question in the press conference about the divergence between fed fund futures and the famous Dot Plot(page 3 of the FOMC Projection Tables report). That is Fund Futures are now implying a funds rate of 0.75% at the end of 2015, while the dot plot says 1.375% One source of divergence is that the Fed is polling its members about the appropriate rate, not the rate which will obtain.


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