(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
March 19 The Federal Reserve is telling us that
not much has changed in the economy except rates are going to go
That is either growing hawkishness or a communications flub
by Janet Yellen in her first Federal Open Market Committee press
Today's FOMC announcement didn't change much in terms of the
Fed's economic outlook. The employment outlook is ever so
slightly more positive but GDP forecasts for this year were
taken down a modest peg. That excepted, the FOMC doesn't see
much difference between today's economy and the one they
described in December. There is a slight weakening. Other than
that, the committee does not appear to be expecting much
difference in the economy relative to the outlook in December.
Things seem a bit weaker than January, but bad weather
obscures the true state.
"You have to read this statement as risk off," Steven
Englander, a strategist at Citigroup, said in a note to clients.
"Other than the very short-term bounce from the bad weather
of this winter, supply-side projections are weaker, not
stronger, but rates projections are higher."
According to the Fed's own projections, fed funds can be
expected to be higher in the future than they thought in
December. The median projection by FOMC officials was for an
end-2015 rate of 1 percent, as against 0.75 percent in December.
Rates at the end of 2016 are seen at 2.25 percent, up 50 basis
points compared to December's forecasts.
If you ask me, an economy which is getting stronger at the
same languid rate but is seeing interest rates rising faster is
one seeing real tightening in monetary conditions.
Perhaps even more importantly, Janet Yellen during her press
conference indicated that rates might be expected to rise six
months after the taper is done and QE ends. That puts the first
rate rise in the first several months of next year, a good bit
sooner than markets had been anticipating.
"It depends what conditions are like" in the labor market,
Yellen said, by way of hedging, also noting that the Fed might
hold if inflation stays low.
Still, the central forecast is for getting higher rates
without getting much of a recovery.
That's terrible for financial markets, which are duly
HAWKISH OR HAM-HANDED
Interesting too that Yellen, in her first press conference
as Fed chair, argued that we should be paying more attention to
the statement, which was a record 877 words, than to the hard
data in the charts and forecasts of the economic projections.
Words, as any lawyer will tell you, are inexact in their
meaning, a state to which the FOMC statement always seems to
aspire and usually reaches.
That desire, if that is what it is, for wiggle room, was
also underscored by the decision to drop the 6.5 percent
unemployment rate threshold.
Two options seem possible to me:
1 - That the Fed is more hawkish, but doesn't really want to
discuss it that openly.
2 - That giving the impression of rates going up more
quickly was a bit of a communications fiasco.
If we look at the first it is significant that Yellen said
that some Fed officials "note that the potential growth rate of
the economy may be lower at least for a time."
If potential growth rate of the economy is lower, keeping
low rates won't give you as much bang for your buck, but will
still potentially distort markets and the economy. That's an
argument for raising rates sooner, a sort of argument of
exhaustion with low rates.
The Fed also seems to see normalization of rates but sees
that normal as being lower than before, another nod to lower
potential growth. That's a sclerotic, stagnant economy, and a
disaster for risk assets.
Now on the other hand, as is so often the case, the Fed may
look around at the falls in financial markets and re-think their
position. Yellen may simply have made a rookie mistake in being
so specific about the timetable, and may wish for a do-over.
It is very possible that we see a row back, a bit more
dovishness, in the next week or so from Fed officials.
If not, Santa Claus Fed - that old tendency for the market
to usually rise around FOMC meetings - may be a thing of the
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)