Today’s Federal Reserve statement does as much as it can to make December a live meeting while omitting any language that suggests an explicit commitment to hike rates: The Federal Open Market Committee (FOMC) has left the door open.
Comparing today’s statement to September’s, the opening paragraph (as expected) essentially marked to market by acknowledging the obvious – that the “pace of job gains slowed.” But it also upgraded its assessment of household spending and business investment, which are now said to “have been increasing at solid” – no longer “moderate” – rates. In the second paragraph, one of the two sentences referring to “global developments” that “may restrain economic activity” was simply dropped, but language remains on how the Fed is “monitoring” said global developments.
But these are just the preliminaries, and the Fed obviously knew that all eyes would be on paragraph three. Here is the key new language:
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation.
There are two significant things with these word choices. For the first time in a Yellen-era Fed statement, there is an explicit acknowledgement that a decision at the next meeting is under serious consideration. Also, whereas past statements had focused on the passive decision to “maintain” the current target range for the fed funds rate, this statement focuses on the active decision to raise the target range. However, there was nothing new in the statement about the conditions that will have to be met for the Fed to hike. As in prior statements, the Fed will want to be “reasonably confident” that inflation will return to target, and it wants to see “some further improvement” in the labor market.
So this statement opens the door to a hike in December, but it does not commit the FOMC to actually step through that door. For example, had the statement instead added (purely hypothetically) that “the Committee expects that these conditions will be met in December” – as, for example, Janet Yellen herself said in so many words in Amherst last month – that would be a much stronger statement of the Committee’s conviction. And perhaps the reason the statement is silent on this point is that we now know that at least two Fed governors – Brainard and Tarullo – do not expect these conditions will be met to their satisfaction by December. Fed Chair Yellen would obviously desire to have unified, if not unanimous, Committee support for the first rate hike. But she may face a choice: Hike in December with opposition from within, or punt in December with criticism – and perhaps opposition – from without.