Content provided by Marc Pfeffer, CLS Senior Portfolio Manager
We saw two key changes in the Federal Open Market Committee (FOMC)’s October statement. First, the committee removed this earlier mention: “recent global and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” That doesn’t mean a rate hike is certain this year, but as Jon Hilsenrath of the Wall Street Journal notes, it does remove a previously-stressed impediment.
The second was an explicit mention of the Fed’s next meeting in December. “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 objective of maximum employment and 2% inflation.” As Hilsenrath notes, the reference means decisions “are now being made on a meeting-to-meeting basis.”
As expected, bonds sold off on the news. Stocks originally sold off only to recover sharply as the market came to the realization that good news is good news.
- The Fed noted the housing sector and household spending have shown solid growth, but net exports are soft, job gains have slowed, and unemployment is steady.
- Low energy prices were cited as a factor keeping inflation at a manageable pace, but the committee said it expects inflation to rise as the impact of energy prices wears off and the labor market improves.
- The Fed said future inflation expectations moved “slightly lower” which, as Hilsenrath notes, could mean consumer prices won’t rebound soon.
- The Fed wants to be “reasonably confident” that inflation will move back to 2 percent before it raises rates.
- The committee ended its statement on a dovish note saying even after employment and inflation are near desired rates, “economic conditions may, for some time, warrant keeping” rates below normal levels.
The Fed’s next meeting, and final for the year, is December 15-16, 2015.