The Federal Reserve is no longer patient. But that doesn’t mean the central bank is impatient, Chair Janet Yellen said Wednesday.
As expected, the Federal Open Market Committee replaced its more hesitant language about being “patient” on normalizing monetary policy with the equally vague language of reasonable confidence: The committee will raise rates when its members are “reasonably confident that inflation will move back to its 2 percent” target.
So when will that be? A June rate hike is still very much on the table. It won’t necessarily happen then, Yellen said, “but we cannot rule that out.” At her December press conference, when the FOMC first introduced the word “patient,” Yellen specified that “patient” meant two meetings.
What the bank is saying is that hiking the federal funds rate “remains unlikely” at April’s FOMC meeting. That was never really a question (in part because Yellen is not scheduled to deliver a press conference at that meeting).
Deciphering Federal Reserve forward guidance is often a guessing game built on parsing its carefully chosen language. But as CNBC’s Steve Liesman reminded us at Wednesday’s press conference, it wasn’t too long ago that the FOMC had more concrete metrics in its releases — specifically that the committee wouldn’t raise rates as long as unemployment was above 6.5 percent.
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To be fair to the FOMC, its members are often vague because they don’t know what the economy will look like in the future. “I don’t have a mechanical answer for you,” Yellen told reporters when pressed about what it would take for the committee to be reasonably confident about inflation rising. “Of course we cannot provide certainty,” she later added, “because we’re not certain what the data will look like.”
Buzzwords aside, what the Fed had to say about economic growth, as well as its employment forecasts, are more interesting and tell a more dovish story about when the bank will raise rates. Notably, March’s FOMC statement acknowledges that despite continued labor market improvements, “economic growth has moderated somewhat.” That’s a change from January’s release, when the FOMC said, “economic activity has been expanding at a solid pace.” (See all of the linguistic changes in the Wall Street Journal’s statement tracker.)
In another change from December, the Fed lowered its GDP expectations for this year based on disappointing first quarter growth. It also lowered its inflation expectations from its December projections, in part because of lower energy and export prices. The central tendency (of all the projections of Federal Reserve Board members and Federal Reserve bank presidents) is that inflation will be slightly less than 1 percent this year and not reach 2 percent until 2017. Based on those projections, there’s not much reason for the Fed to be impatient on raising rates.
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The FOMC painted a mostly sunny view of the labor market Wednesday, noting that conditions are moving toward its “maximum employment” objective. (Remember that the Fed, unlike other central banks, has a dual mandate to maintain full employment and stable prices.) The unemployment rate is currently at 5.5 percent, and the economy added nearly 300,000 jobs last month. But if its employment forecast is any indication, the Fed thinks unemployment can fall lower than it is now — perhaps to 4.8 percent in 2017 — which may be a hint the FOMC is ready to keep rates lower longer.
The single most important thing that happened today is that the Fed redefined "normal unemployment" 5.2-5.5% down to 5.0-5.2%.
— Justin Wolfers (@JustinWolfers) March 18, 2015
Indeed, Yellen acknowledged at her press conference that there’s still significant slack in the labor market, with part-time workers unable to find full-time work and discouraged job-searchers not continuing the hunt. Average hourly wages have barely budged, having increased 0.1 percent in February.
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Although wages are an important component of the monetary policy debate — economists typically expect them (and inflation) to rise when unemployment falls — Yellen, in what could be viewed as a hawkish moment, said Wednesday that wage growth is not a “precondition” for raising rates. In fact, she said that they may not rise any time soon — a perspective echoed by economist John Komlos on Making Sen$e Tuesday.
Overall, the FOMC’s forward guidance and the Fed’s forecasts pleased Wall Street (the Dow Jones Industrial Average climbed above 18,000). For the markets, the Fed’s unassertive tone on raising rates — not impatient — may have been just the news they were waiting for: we’ll see a rate hike soon, but not yet.