On June 17, 2015 we got the latest statement from the FOMC regarding monetary policy. In true Fed fashion the statement used their seemingly mandated words modest or moderate to describe the economy’s improvement since their last meeting in April. The good news is that they did acknowledge improvement in the labor market in as positive a way as possible without disturbing their current forward guidance language. The bad news is that they continue to leave us with conflicting statements like these two:
“Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term”
Which is then followed by:
“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
The inflation condition expected in the second statement has already been confirmed in the first statement. Furthermore, we know that the labor market has improved since the April statement and is arguably at or near full employment. As I discussed previously in my “Yellen – Then and Now” post, the Fed has proven it will apply the same language to dramatically different situations in order to manage its forward guidance language. This is where the opportunity lies for investors to call the Feds bluff. If we look at current employment, CPI and PCE levels, we should no longer have ZIRP and the Fed is indeed behind the curve. That being said, people like to make arguments for ZIRP based on potential secondary effects of a non-ZIRP policy on Europe and some emerging markets. My response to that is, if the Fed moves further away than it already has from its mandates to actually include the management of foreign economies, then we really will create asset bubbles here from having completely inappropriate discount rates. Since the release of the last NFP report, we have already seen long term rates move higher to reflect a strengthening economy. The only thing that has subdued the move in rates has been the possibility of contagion from a Greek default and the associated unknown risks to the Euro. Given the mentioned situations, I continue to see Fed liftoff anytime from July through the September meeting.