If I had to weigh in on the debate, I’d say the September Federal Open Market Committee (or FOMC) policy statement was “hawkish.” But more importantly than such nomenclature, I believe there were five signs in the statement that the anticipated pace of policy rate hikes is going to be quicker than markets have expected.
Toned down “dovish” phrases. While the September statement retained both “keyword phrases” that are interpreted as highly dovish (“maintain the current target range for the federal funds rate for a considerable time” and “significant underutilization of labor resources”), Fed Chair Yellen appeared to dilute the strength of the “considerable time” language in her press conference, implying that a “considerable time” could be a shorter time period than many expect.
Market Realist – The U.S. economy has shown strength in 2014 and many indicators have been pointing to this fact. The above graph shows the Fed’s leading indicator index along with the U.S. real GDP. The index has been in an uptrend in 2014 and U.S. GDP increased after the first quarter slow-down. The index is currently hovering around levels we saw before the U.S. financial (XLF) crisis of 2008.
Federal Reserve Chair Janet Yellen has also made it clear that “considerable time” is not a quantitative measure of an expanse of time but is largely data-dependent. Since U.S. economic data seem largely positive, as the leading indicators above show, a sooner-than-expected rate hike could be on the horizon.
Continue reading to the next part of this series to learn more about the toned-down “dovish” phrases of the FOMC policy statement.