Fed Notes: October 29, 2014

October
29

Written by: Jon McGraw

Apparently last week’s comment by St. Louis Fed President James Bullard who requested for the Fed to continue quantitative easing, “…at least at its present levels…” (subsequently dubbed the ‘Bullard Bounce’ by Barron’s after positive market reaction) went unheard by chair Janet Yellen and voting members of the Fed’s Federal Open Market Committee (FOMC). As did Chicago Fed President Charles Evans’ outlier position — suggesting consideration of yet another Quantitative Easing 4….

Today the FOMC voted to end its bond-buying stimulus program known as QE3 and sent several positive signals to markets that it was comfortable with moderate U.S. growth, and not worried about global weakness, inflation near 1.7%, or increased volatility in financial markets.

In the FOMC statement issued by the Fed on Wednesday, it left unchanged its pledge that rates would remain near zero for a “considerable time.” But qualified their statement, saying that if the economy improves faster than expected, the first rate hike could come sooner than anticipated.

The FOMC statement also suggests a major change to the Fed’s view on labor markets. Instead of seeing “significant underutilization” in the labor market, which was in their previous statement, the Fed now writes that underutilization in labor resources “is gradually diminishing.”

Concerning inflation, the Fed wrote that surveys of longer-term inflation expectations have “remained stable.” It said that low inflation has been held down by low energy prices and “the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.”

Only one member of the ten-member FOMC dissented – Narayana Kocherlakota, the president of the Minneapolis Fed. Two who had dissented in September — Richard Fisher of the Dallas Fed and Charles Plosser, the president of the Philadelphia Fed —supported the FOMC statement. Click HERE to read the full document.

Perhaps the Fed is trading in dove wings or feathers for hawk as QE3 comes to a close. So while the bond buying ends, markets will turn focus to when the Fed will raise interest rates. As expected, there are significant differences of opinion among FOMC members and regional Fed presidents on the potential timing of the first rate hike. As prudent, Buttonwood will stay tuned-in to this Fed station and keep you up-to-date.