FOMC Meeting: A Non-Event

As expected, there were virtually no changes to the forward-looking parts of the October FOMC statement or to the parts describing monetary policy. The Fed will continue to purchase USD 40bn in mortgage-backed securities each month and continue the current "twist" programme in Treasurys. The Fed reiterated that it will continue its asset purchases and potentially scale these up until the labour market improves substantially.

In addition, the calendar year guidance was maintained, stating that the FOMC expects the Fed Funds rate to stay exceptionally low until mid-2015. As in September, it was added that this implies that the highly accommodative stance of monetary policy will be kept in place also after the economy strengthens.

The description of household spending was upped slightly, stating that consumption has advanced a bit more quickly but this was countered by a downgrade in the language of business fixed investments. In addition, it was noted that higher energy prices had pushed inflation higher recently.

Although there were no indications in the October statement that the Fed is moving closer to an Evans rule, we nevertheless think that this will be the next step from the FOMC. The biggest obstacle is to find consensus within the FOMC on the relevant variables to target and the thresholds which would trigger a Fed Funds rate hike. This is a work in progress and we expect it to take some time before the FOMC is ready to announce its new rule.

The main challenge lies in the variable that captures the state of the labour market. We think the Fed will eventually use some sort of adjusted unemployment rate which takes into account both developments in the labour force and unemployment as target. A more drastic move would be to implement nominal GDP targeting, but this is not the signal we are currently getting from the FOMC.

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