The markets felt comfortable with the dovish reassurance that came out of the Fed meeting, with the ‘considerable time’ phrase in the statement telling investors that the FOMC was in no hurry to start raising rates in the spring — the feared timeline for a quicker rate hiking process. The Fed Chair’s answers to many questions about the ‘considerable time’ phrase in the statement tried to emphasize that it didn’t have any ‘mechanical interpretation,’ essentially robbing the phrase of any value whatsoever.
The accompanying projections from the committee members show that a majority see the Fed Funds rate to have reached the 1.25% to 1.5% range by the end of 2015, a slightly more aggressive path for rate increases relative to the June projections. Importantly, their exit plan envisages continuing to reinvest the proceeds of maturing bonds following the end of QE next month. They will start evaluating ending the reinvestment process after the first rate hike. The Fed doesn’t expect the size of its balance sheet to get back to pre-crisis levels EVER, but does see it getting back something resembling a 'normal level' (whatever that is) by the end of the decade.
The Fed may not be on a pre-set timetable, but they will set policy in response to incoming economic data. And on the data front, this morning’s labor market and housing data was unequivocally positive. The August Housing Starts and Permit numbers this morning came short of estimates, but there were big positive revisions to the prior month’s numbers. So, if you average the two months’ data, you still end up in the all-important 1 million level for both starts and permits, which is where you would like the market to be. The initial Jobless Claims data was even stronger, with the initial claims level dropping to its lowest level in years, reconfirming that the steadily improving economy is bringing down the pace of layoffs.
This type of positive economic data would have normally been viewed as less favorable from the Fed angle. But investors appear ready to suspend that view for today in the after-glow from yesterday’s Fed comments.
Related:
Fed Expected to Clarify Course
