Fed Notes: December 17, 2014
Federal Reserve Calls for Patience
Janet Yellen and Federal Open Market Committee (FOMC) members used the temperate word of “patience” to describe their move toward raising short-term interest rates in 2015, moving away from the current Fed Funds target rate of between zero and 25 basis points.
In what is perhaps the least unanimous vote for Janet Yellen’s FOMC thus far, the Federal Reserve press release indicates that three Fed officials dissented, Dallas Fed President Richard Fisher , Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota. Mr. Plosser and Mr. Fisher are known as “hawks” among FOMC members who want to move faster toward rate increases in consideration of current economic improvements while Mr. Kocherlakota is a “dove” who prefers to wait for greater evidence of improvements.
Many economists think the FOMC will raise interest rates mid-year next year, the thought being in part that the Fed will want to steer clear of the perception of influencing votes for the 2016 Presidential race. Not wanting to repeat what former Fed Chairman Alan Greenspan faced in 1992 when he was blamed by former President George Bush, Sr. for not being re-elected. With there being no presidential incumbent for the 2016 race, the FOMC may be able to stretch the point of interest rate increase closer to election time without fear of political repercussion.
For weeks before today’s FOMC policy meeting decision, members debated whether and how to drop the assurance that rates would stay low for a “considerable time.” This statement has been referenced often in speeches by FOMC members and Fed District Presidents to convince the public that rates aren’t going to rise any time soon.
Some Fed officials worried that dropping that assurance would jolt markets and inadvertently lead some investors to believe the Fed was moving toward rate increases sooner than planned. Rather than drop the much-watched “considerable time” assurance altogether, the Fed introduced the “patience” language and said it means essentially the same thing.
U.S. stocks extended gains after the statement was released at 1 p.m. Central time. The Dow Jones Industrial Average ended the day up 288 points to 17356. The Dow gained nearly 100 points just minutes after the FOMC statement was released.