FOMC Statement: Is “Considerable Time” Already Dead?

Many now expect the FOMC to begin to normalize its stance on policy as early as the second quarter of 2015. Newspaper articles such as “Fed Aims to Signal Shift on Low Rates,’( Wall Street Journal, Dec. 9, 2014) focus on whether the Committee will actually remove the “considerable time” language at its meeting next week. The key question is, if the wording is removed, should its absence even be regarded as news, or will it be interpreted by markets as just an “on your mark” signal by the Committee?”

Objectively, way too much attention is being focused on the meaning of “considerable time” in the statement, given what has been communicated by Chair Yellen and others in their speeches as well as in the minutes of past FOMC meetings. Effectively, by saying, as the Committee has now repeatedly done, that any movement towards normalization will be data- and not time-dependent, the FOMC has already removed any import that might reasonably be construed for the words “considerable time” or that was ever intended by the Committee. What the incessant parsing of FOMC statements, minutes, speeches, and interviews suggests is that from the market’s perspective the FOMC’s current communications strategy is not yet well formed or understood. Indeed, rather than focusing on the “considerable time” language, journalists and pundits should instead be trying to understand what the Committee intends to communicate when it says that its policy depends upon incoming data. The key questions now are “what data?” and “how do any policy moves depend upon those data?”

Past attempts by the FOMC to put markers in place have failed. An example is the forward guidance the Committee gave when it stated that it would begin deliberations on a policy move when the unemployment rate reached 6.5% and inflation reached the target of 2%. That guidance was quickly eviscerated by the rapid and totally unanticipated drop in the unemployment rate that has occurred, even as the labor participation rate continues to languish. The Committee was forced to bob and weave over the course of several meetings to explain why it was reluctant to act.

That dancing and jabbing continues, as evidenced by the response of Vice-Chairman Fisher, quoted in yesterday’s WSJ, to the question whether, when the Committee stops using the words “considerable time,” it means that rates are about to go up. Vice-Chairman Fisher indicated that the Committee could not give a precise date when rates would go up, so it had fallen back on simply stating that a move depended upon incoming data. The Vice-Chair went on to say, “How can the markets have a correct date if you don’t tell them? Well, they can guess when the data will be in the situation that justifies starting the process of raising the interest rate” (Wall Street Journal, December 9, 2014). In view of that perspective on forward guidance offered by the Committee’s vice-chairman, the Committee’s omission of the words “considerable time” from its statement would clearly provide no grounds for inferring anything precise about the data triggers that will inform the Committee’s future interest-rate moves.

One would hope that more clarity might be forthcoming from the Committee’s deliberations next week, the accompanying SEP (Summary of Economic Projections), and Chair Yellen’s press conference. But it is more likely that we will remain in limbo and be forced to guess, as Vice Chairman Fisher has suggested, about what data will be important to the Committee and how that data will be weighed in the decision-making process. As for right now, we think that those expecting an early move are premature, for several reasons.

First, there is no sign of inflation picking up, and any drop in measured inflation will be discounted by Committee participants as temporary due to the recent decline in energy prices. Those who will be looking to wage increases for signs of inflation will be looking for signals from a relationship that arguably has had no explanatory power for predicting inflation for the past 25 years (a regression explaining quarterly increases in PCE inflation, the FOMC’s preferred inflation measure, by quarterly changes in compensation per hour from 1985 to the present has an adjusted R-squared of a mere 5%). The number of people who want full-time jobs but can find only part-time work is still very high, and many of the jobs that are being created are low-paying. So, despite the 231,000 new jobs created in November, there is still considerable weakness in the labor market. Geopolitical risk remains high; dollar exchange-rate appreciation is likely to continue, dampening US exports; and major countries around the world are struggling and perhaps slipping back into recession. Raising rates in the face of those risks might further destabilize the prospects for recovery abroad and could trigger overreaction in the US as well. All of these factors argue that the FOMC is likely to remain cautious for some time and will be reluctant to act until economic prospects become clearer and probably not until late into 2015 or even beyond, “depending on the data and our best guess.”

BY Bob Eisenbeis