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Fed Gives Mixed Message

David Becker
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The FOMC cut its bond purchase program by an expected $10 billion and there were no major surprises in the statement. The Fed still sees rates staying low for a “considerable time” after their bond purchase program ends, though Philly Federal Reserve bank President Plosser objected to this inclusion. The Committee said growth in the economy rebounded in Q2, and noted an “improved” labor market. However, it indicated that “a range of labour market indicators suggests that there remains significant underutilization of labour resources.”

The Fed also noted “inflation has moved somewhat closer to the Committee’s longer-run objective,” but said that longer-term expectations remained stable. The Fed downgraded risk that inflation persists below 2%, which it previously said could pose an economic risk. On the one hand, outlooks on growth and inflation were nudged up a bit, but on the other the investors face ongoing dovish commentary and policy guidance.

The economy has not improved enough to make a change to policy and today’s ISM Chicago manufacturing data shows that the US economy is still in the process of changing. The Fed wants to see a clear path of strong growth before making a change, which means that they might be behind the curve before they act.

The Fed is inching closer to normalization, but rate hikes are still a ways off and not likely before Q2 of 2015. Yellen and Co. acknowledged the obvious signs of improvement in the economy and job market. The statement was riddled with caveats to allow policymakers to maintain the ultra-accommodative stance for now. Also, there were no indications of what policy tools would be used in the normalization process. There was one dissenting vote, but it was from the Philly Fed’s Plosser rather than the Dallas Fed’s Fisher. Nevertheless, Plosser is also one of the most hawkish on the Committee and thus his dissent is not that alarming.

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