The Fed continued to use the dovish “considerable time” language last week (saying interest rates would *not* rise soon, after QE ends). But the Fed’s “dot chart” clearly showed rates increasing next year.
In the meantime, the Fed clarified the tools they would use (eventually) to tighten, with the interest on excess reserves (IOER) playing the primary role. Reverse repos (RRPs) would be used as a secondary tool. Then, the Fed plans to let the balance sheet passively decline.
Perhaps it is best to characterize Fed Chair Janet Yellen not as a hawk or a dove, but as a “scientist”: when the data changes, she will change policy. Today, slack in the U.S. economy requires dovishness. That will not always be true – and the Fed’s 2015 forecast has already started to prepare the market for this eventuality.
The current data also suggest that the U.S. economy is getting more normal. The NY Fed mfg index surged to 27.5 in September last week, and the Phil Fed index remained solid at 22.5. Our SLIM survey of manufacturers also registered strong growth. The NAHB housing market index made a new high at 59 in September. Weekly initial jobless claims fell to 280,000 last week. The U.S. LEI increased +0.2% m/m in August. U.S. consumer net worth continues to increase.
To be fair, not all the economic data has been strong, with U.S. mfg industrial production falling -0.4% m/m in August and housing starts declining to a 956,000 annual rate. But it’s difficult to continue to use “emergency” monetary policy tools, if the economy is looking more normal as a whole. Low inflation (CPI -0.2% m/m and PPI flat in August) give the FOMC some breathing room. But the Fed doesn’t need to be in crisis mode for the foreseeable future.
Looking out to 2015, it seems likely that the Fed can remove policy accommodation, even if that accommodation is “removed at a pace that is likely to be measured” (as it was in 2004 – that’s the phrase from the May 2004 Fed statement).
Strategas Research Partners