FOMC Statement – March 18, 2015

The FOMC has released its latest monetary policy statement.  You can read it here, but it probably isn’t necessary this time around.

The big news is that the word “patient” has been dropped.  Janet Yellen has assured us that this doesn’t mean the Fed will be impatient either.  Analysts are taking this to mean that the first rate hike will not occur until June or later.

Analysts are also now expecting the rate increases to be less dramatic once they start coming.  For this reason, markets soared on Wednesday.  Stocks were up.  Gold was up.  Bonds were up.

Yellen held a press conference at the end.  One interesting thing I noted was her saying that the Fed will consider stopping its policy of rolling over maturing debt at some point in the unspecified future.

Right now, it is the Fed’s policy to roll over maturing debt.  This keeps the monetary base stable.  If the Fed allows debt to mature, it essentially removes assets from its balance sheet.  This would be monetary deflation.

I find it almost impossible to believe that the Fed is going to reduce its balance sheet in any significant way in the future, especially if the CPI remains relatively low.

As far as the rate hikes go, I don’t think they matter much except in terms of perception.  Since the Fed won’t be significantly reducing its balance sheet any time soon, the only way to raise the federal funds rate is to increase the rate paid to banks for their excess reserves.

I see this whole big deal about raising rates as nothing more than giving another bailout to the banks.  Raising rates is not going to affect the monetary base in the near term.  Raising rates may not even affect market interest rates.  The 10-year yield continues to hang around the 2% mark, despite expectations of a Fed hike later this year.

I think the big things to pay attention to are the CPI numbers (because the Fed watches this) and the overall economy.  If we see signs of a deep recession coming or if the stock market tanks, then I think all of the talk will change quickly.  The question at that point will be when the Fed starts another round of so-called QE and how big it will be.

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