In a Nutshell: “…the Committee decided to conclude its asset purchase program this month.”
Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%
Quantitative Easing Decision: Ended.
The FOMC met and issued its statement about economy and the direction of monetary policy. Not surprisingly, the Committee decided to end, finally, quantitative easing. The members also reiterated “that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program.”
While the ending of QE3 and the continued use of “considerable time” were expected, there were enough changes in the statement to make it clear that the Fed is transitioning to rate hikes. First, and maybe most importantly, the members now believe “a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing” rather than “there remains significant underutilization of labor resources.” Since it is all about the labor market, it is now clear that the Fed believes the labor market is tightening.
But it wasn’t just the comments about the labor market that make this an important statement. The Fed also signaled it is less concerned about deflation. The Committee noted that “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year”. This is in contrast to just saying it was running below its desired pace.
So, what is the take away from the Fed’s comments? If we keep seeing the kind of economic progress that we have had for the past few months over the next few months, the Fed will have to start talking specifically about tightening. Between now and the December 16-17 FOMC meeting, we get third quarter GDP and two more employment, consumer spending and inflation reports. Don’t be surprised if at that meeting, there has been enough strong data that the Committee removes the “considerable time” verbiage as a signal that the time for rate hikes is coming sooner rather than later. I am sticking with my expectation that the first increase will come in the spring, possibly as early as the March 17,18 meeting.
How should the markets take this statement? First, there really should not have been any surprise in it. If people didn’t know QE was over, they probably made the mistake of flying into New Jersey and wound up being quarantined. On the labor market front, I have been arguing for months that things are better than the common wisdom and the Fed’s edging toward that view also should not have been shocking. But uncertainty on the timing of rate hikes remains, though those who pushed things off until well into the second half of next year are probably backpedaling, again. Thus, we are still in for lots of volatility when the economic data surprise either on the upside or downside. Rates are going up next year, so let me remind everyone that eight meeting times 25 basis points per meeting comes to 200 basis points in a year.