Fed Watch: Looking Backward to See the Future

Is this our future, brought back from the past? A contact referenced the last hike cycle via the FOMC statements from 2003-04 (emphasis added):

October 28, 2003:

The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period.

December 9, 2003:

 The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.

January 28, 2004:

The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

March 16, 2004:

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

May 4, 2004:

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

June 30, 2004:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent.

“Patient” lasted for two meetings before being replaced by “measured.” This is fairly consistent with my expectations. My baseline scenario is that the Fed drops “considerable” entirely in January, retains “patient” in March, drops “patient” in April, and raise rates in June. In her press conference, Federal Reserve Chair Janet Yellen said:

There certainly has been no decision, you know, decision on the part of the Committee to move at a measured pace or to use language like that. I think quite a few people looking back on the use of that language in the–I can’t remember if it was 12 or 16 meetings, where there were 25 basis point moves. We’d probably not like to repeat a sequence in which there was a measured pace and 25 basis point moves at every meeting. So I certainly don’t want to encourage you to think that there will be a repeat of that.

If she really believes this, Yellen will not push to replace “patient” with “measured,” but instead some more vague data-dependent type language.

Bottom Line: Assuming the data holds, maybe history will repeat itself. If it really is this easy, I have no idea what I will be writing about for the next six months.

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