On Wednesday, the Federal Reserve made its final policy announcement of the year.
In a note to clients following the Fed meeting, Bank of America Merrill Lynch Hans Mikkelsen has a simple breakdown of the seven things we know after Wednesday’s big meeting:
- 15 of 17 FOMC members expect an initial rate hike in 2015.
- No FOMC meeting in 2015 is completely off the table for the first rate hike, regardless of whether there is a press conference scheduled.
- Only the January and March meetings can be considered “unlikely” candidates for the first rate hike.
- The April FOMC meeting is not an “unlikely” candidate for the first rate hike.
- The most common view of the first rate hike is “middle of next year,” which BofA takes to mean the June meeting.
- After rate hikes begin, the pace will not be near the consistent 25 basis point increase seen in the 2004 tightening cycle.
- The Fed expects interest rates to eventually get to 3.75%.
There were no major surprises on Wednesday, but the biggest change is that the Fed dropped the phrase “considerable time” in favour of “patient.”
Here’s the key passage:
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
This change had the market a bit confused, given that the following sentence said:
“The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 per cent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October.”
So, the Fed’s statement contained the words “considerable time,” but used them only as a point of comparison: this is what our guidance is (“patient”) versus what it used to be (“considerable time”).
Additionally, the Fed said these are equivalent. And so all things considered, not the easiest message to parse.