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Breaking Down The FOMC Statement; Dovish or Hawkish?

by Michael L. Baker, Sr. Mortgage Loan Officer at Affinity Mortgage.

 

There were a TON of rather inconsequential verbiage changes in the Fed statement.  Most of these are merely incidental.  Here are a few that could connote some deeper meaning:

1. The Fed now says that economic activity has continued to expand a moderate pace whereas the previous statement said that economic growth slowed late last year.

2. The Fed added completely new verbiage for “consumer and business sentiment.”  Neither “consumer” nor “sentiment” were present in the previous statement.  This could be a nod to the post-election animal spirits that some analysts credit for improved sentiment surveys.  It’s net-hawkish, but not much more than an observation of recent data.

3. The Fed now says “Inflation increased, but is still below the objective.”  Previously, they said Inflation has continued to run below the objective–a fact that reflected declines in energy prices.  This is also net-hawkish, but again, not much more than an objective observation.

4. The Fed dropped some verbiage that said “inflation is expected to remain low in the near term” and replaced it with the expectation that “inflation will rise to 2 percent over the medium term.”  Here too, net-hawkish, but no surprise.

5. The Fed dropped the verbiage about “transitory effects of declines in energy and import prices.”  Net-hawkish, no surprise.

6. The Fed added a new line about the economic outlook appearing roughly balanced.  They also dropped verbiage that listed “risks to the outlook” in the factors they were watching.  That said, they’re still watching everything they were watching before (inflation and global economic developments). In fact, this change was more about shifting the focus to say they’re watching “inflation indicators” specifically as opposed to saying they’re watching  financial and economic developments and assessing their implications on labor markets and inflation.  The new version reads much better.  The old version was sort of silly in retrospect.

7. The Fed got more specific in the 3rd paragraph, dropping the vague “given the economic outlook” and replacing it with “In view of realized and expected labor market conditions and inflation.”  Not sure this matters, but it could be their way of refocusing on their true mandates (which are just labor markets and inflation).

Notably, NOTHING about the last 2 paragraphs changed.  That’s where they talk about future policy.  Those are the most critical paragraphs as they will give us the first indication (some day) of a change in the Fed’s reinvestment plans or rate hike trajectory.  This also means they kept the “only gradual” rate hike pace verbiage, and didn’t even hint at changing reinvestment’s in any way.  This is the one, major “net-dovish piece of the statement that balances out all of the slightly more hawkish/upbeat changes that preceded it.  Case in point, bonds haven’t moved much since the statement came out.

 


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