The Federal Reserve will maintain its rates low for a considerable period

The Federal Reserve has again clearly indicated that it didn’t want  pre-commitments on the moment when it will change its interest rates. That’s what we have to keep in mind from that FOMC meeting.
One year ago, the Federal Reserve and other central banks have developed the notion of forward guidance. Change in monetary policy was linked to a level of the unemployment rate and of the expected inflation rate. But it is the past. Now forward guidance is a single sentence that says: “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends” A change can be expected in the future when macroeconomic conditions will have change sufficiently and will be robust enough. This is not the case yet. But with this kind of forward guidance there is no possibility to link the change in monetary policy to the specific profile of one or two economic indicators.
During the press conference, Janet Yellen has refused to change the “considerable period” into a calendar measure. (At her first press conference she said 6 months, it was probably a mistake). This shows that she doesn’t want to take a specific commitment that could give information on the moment when the Fed could move.
One point to notice is that the long run target for GDP growth has been push marginally downward. In June the target range was 2.1% – 2.3%, now it is 2% – 2.3%. Is it a change linked to a kind of secular stagnation? This would imply that the equilibrium interest rate could be in the future lower that what we have in mind when the economy will be back to a more normal trajectory.
Fed members still expect that interest rate change will take place in 2015 but the median rate at the end of 2015 is now 1.375%. It has to be compared to 1% in June. The picture is not the same. I still expect a first hike at the September meeting
A new release give conditions on how the Fed will manage the end of the Quantitative Easing. It is just for information and not a information on monetary policy stance. The Fed will reduce its asset purchases in October by USD 10bn to USD 15bn. The end of the QE is still expected in October.
No real surprise at this FOMC meeting. As expected the status quo was the rule (see here)

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