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In today’s post we’ll focus on comments made last week by both Bank of Canada (BoC) Governor Poloz and U.S. Fed Chair Janet Yellen.
The U.S. Federal Reserve’s Latest Guidance
The U.S. Fed offered its latest market guidance last week using both its post-meeting formal statement and accompanying press conference comments from Fed Chair Janet Yellen.
The Fed finds itself in an increasingly difficult position when issuing policy statements, as I detailed last week. In essence, its delicate choice of words must prevent any rise in irrational exuberance while at the same time not triggering a spike in bond yields by disrupting markets with overly hawkish language around the timing of its future interest-rate hikes, as it has done previously.
Here are the highlights from the Fed’s latest communications:
- The Fed decided to avoid risking a short-term spike in U.S. bond yields by retaining two key phrases that it has repeatedly used to reassure investors that rates aren’t headed higher anytime soon. It said that it would "maintain the current target range for the federal funds rate for a considerable time" and that the U.S. economy was still experiencing a "significant underutilization of labor resources". Many market watchers speculated that the “considerable time” phrase would be removed, but it wasn’t.
- The Fed knew that investors were anticipating some change in its policy guidance in response to a broad range of improving economic data. It decided to exercise caution on that front, but still wanted to temper a “low-rates-forever” mindset that might fuel an additional surge in speculative investment. To that end, in her accompanying comments, Fed Chair Yellen cautioned that the key phrase “considerable time” could be shorter than many people expect. The Fed also raised projections for the Fed funds rate in both 2015 (1.375%) and 2016 (2.875%), meaning that its key policy rate is now forecast to increase along a steeper path (peaking at 3.75% by the end of 2016).
- The Fed lowered its growth projections for U.S. GDP in 2014 and 2015, which correlates with falling inflation, while at the same time acknowledging that employment conditions had tightened further over the past several months, which correlates with rising inflation.
After doling out a little fodder for both the interest-rate hawks and the doves, so as to ensure that neither camp would be nervous enough to trigger significant market volatility, Fed Chair Yellen emphasized that the Fed’s future path would be data dependent. This phrasing gives the Fed the flexibility it needs to react to significant market changes when they occur, but as a consequence, it also leaves the market free to interpret how each new economic data point, good or bad, will affect the delicate balance of forces that are keeping the Fed in a neutral position.
In the end, I think the Fed wanted to stall for time so it could continue to let the recovery evolve under a lighter Fed hand, which it succeeded in doing. This is much harder than it looks when you’re the world’s most important central bank and the market parses your every word.
How BoC Governor Poloz Made Me Do a Double-Take
Last week BoC Governor Stephen Poloz said that the Bank would not try to influence the value of the Loonie through either its actions and/or its words, and would instead focus on its primary objective of maintaining price stability by using monetary policy to control inflation.
My initial reaction was … really? Did he keep a straight face when he said that?