From the WSJ: “The Federal Reserve said it would end the bond-buying program known as quantitative easing in October, but retained its guidance that short-term interest rates will remain near zero for a “considerable time” after that program ends.“
Let me again ask, where the’s inflation? The Fed doesn’t see much, the WSJ notes, forecasting its preferred price gauge — the personal consumption expenditures price index — to come in at between 1.5% and 1.7% this year, 1.5% to 1.9% next year. The Fed’s official target, recall, is 2%. And here is a summary of today’s inflation report from JPMorgan:
The Consumer Price Index (CPI) surprised noticeably to the downside in August. The headline figure fell 0.2% — the weakest since March 2013 — while the ex-food and energy core index was unchanged — the weakest since January 2010. The year-ago increases in both the headline and core measures now stand at 1.7%
What economist Mike Darda wrote just before the announcement still holds:
Despite a bevy of Wall Street hawks falling all over themselves to predict an abrupt change in Fed language and an earlier than expected ZIRP exit, the case for a sharp Fed U-turn lacks credulity, in our view. With inflation running below the Fed’s target (and recently decelerating) and inflation expectations back below the 200 bps threshold at the five year horizon, there simply isn’t a compelling case for the Fed to pull forward the gradual tightening path now priced into financial markets.
Another reason for the Fed to be patient / gradual is the lopsided history of ZLB exits being premature instead of late. To wit: the Fed tried to exit prematurely (and thus failed) in 1936-1937; the BoJ presided over two premature (and thus failed) ZLB exits in 2000 and 2006 and several European central banks blew it in 2011 with premature tightening, triggering double-dip recessions and deflation risk. Looking ahead, we believe the Yellen Fed will continue to use underemployment gaps, wage growth and core inflation trends as rough guideposts for the equilibrium short rate.