Market Timing Brief™ for 1-27-2016: January Fed Statement Changes from December FOMC Statement

The Fed Statement Changes from December 2015 vs. Jan 2016:

Big Changes, the Bad and the Good:

Bad:

Note they still don’t understand that low energy prices are here to stay. They will fluctuate of course, but from permanently lower levels.

“Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”

Nope! Just don’t see the deflation!

“Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Good:

At least they are not totally brain dead in that they see some risk on the global scene. Not very serious about it though as they don’t admit their outlook is too optimistic. Just that they may have to admit a policy error by the next meeting!

“The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

Did also recognize that growth is slowing to some extent:

From 1st Sentence: “labor market conditions improved further even as economic growth slowed late last year”

The Fed also issued a statement about their policy goals, amending them a bit to recognize that they consider inflation AND DEFLATION risks. That is a nod to those concerned about the risks of deflation:

Here is the entire statement

“Release Date: January 27, 2016

For release at 2:00 p.m. EST

As part of its annual organizational meeting actions, the Federal Open Market Committee reaffirmed its “Statement on Longer-Run Goals and Monetary Policy Strategy,” with a revision to clarify that it views its inflation objective as symmetric, and with an updated reference to participants’ estimates of the longer-run normal unemployment rate in the most recent Summary of Economic Projections (December 2015).

In October 2014, in preparation for the annual reaffirmation, the Committee discussed the potential benefits of amending the statement to clarify that its inflation objective is symmetric. As indicated in the minutes of that meeting, there was general agreement on the symmetry of the objective. Following further Committee discussion regarding the most appropriate way to express this clarification, the statement has been amended to indicate that the “Committee would be concerned if inflation were running persistently above or below” its 2 percent objective. All but one participant supported the amended statement.

The Committee first adopted the statement at its January 2012 meeting and has reaffirmed it, with appropriate revisions, at its annual organizational meetings each January.

Voting for the statement were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against was James Bullard, who agreed the Committee’s inflation goal is symmetric, but believed the amended language is not sufficiently focused on expected future deviations of inflation from the goal.”

You can review the rest of the changes below, but in summary, the Fed:

Sees inflation still rising to 2% over time as oil prices rise (despite evidence to the contrary.)
Sees employment as remaining strong.
Sees growth as having slowed a bit in Q4 2015, but it does not seem to have any doubt that the trajectory of the economy is UP, not down. The fact that industrial production has been in a steady decline since the summer does not seem to phase them.
They will watch for higher levels of economic risk on a global basis. This is lip service, but at least as I said, they are not brain dead.

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