the December 2014 FOMC

The US stock market has rallied strongly since the Fed released a statement from its Federal Open Market Committee meeting on Tuesday-Wednesday and Chairperson Janet Yellen had her accompanying press conference.

The broad picture:

In October, the Fed ended a long period of continually upping the level of monetary stimulation of the US economy.  It is still in a period of applying extreme stimulation but is no longer increasing the amount.  And it is now starting to focus on the nuts and bolts of how to begin to wean the economy from excessive monetary stimulus, a process the Fed envisions will take several years.

Janet Yellen’s main points:

–there’s no set timetable for withdrawing excess stimulus.  The process consists in gradually raising the Fed Funds rate for overnight money from the current zero to a normal level of 3%+.  Most FOMC members think the first rate rise should come during 2015, but the Fed is prepared to slow down the process if the economy is weaker than expected, and vice versa.

Wall Street fears that the Fed will willy-nilly raise rates according to a predetermined formula and without regard to economic conditions is completely misplaced.  The Fed will be patient in this process (the Fed estimate of where Fed Funds will be at the end of 2015 continues to come down and is now at 1.15%; speculation is that the figure Ms. Yellen has in mind is lower).  The major goal is not to disrupt growth.

–inflation is not a current problem.  The Fed has been trying hard with every tool in its arsenal to create conditions where inflation is a possibility for six years without much success.  The Fed did say that it expects inflation will only gradually rise toward its 2% target.  Wall Street fears of runaway inflation are unrealistic.

–deflation isn’t a concern, either.   Investors worried about deflation are making the rookie mistake of confusing headline inflation figures, which contain lots of transitory elements, with core inflation–which is what really counts and which is steady at somewhat under 2%.

–lower oil prices are a net plus for the US, because the country is still a large oil importer.  A Russian recession is more a trouble for the EU than the US.  US trade with Russia is very small; US holdings of Russian portfolio and capital assets are tiny.

Other than its comments about oil, almost nothing the Fed said breaks new ground.  Given the tragic example of Japan’s mistaken attempts to remove economic stimulus too soon, it’s not surprising that the Fed said it will not repeat them here.  The main takeaway from the meeting statement/press conference is that the Fed said this explicitly and in detail, leaving little for the Wall Street rumor mill to worry about.

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