The FOMC statement was on the dovish side, but almost two-thirds of policymakers would raise rates before the end of 2014.
T he FOMC signaled a later start date to the next tightening cycle, stating that exceptionally easy policy will be required “at least through late 2014”. The weighted average of the newly released fed funds projection across 17 policymakers was roughly in line with market expectations, in both real and nominal terms. Interestingly, however, data on the appropriate timing of policy firming shows that 11 policymakers would begin raising rates before the end of 2014 (three favor hiking in 2012). These include projections from non-voting members, but the divergence with the forward guidance language in the Statement shows that Chairman Bernanke and other high-profile FOMC members are heavily skewing the tone of the Statement in a dovish direction.
If it were a simple majority vote, the Fed would be inclined to tighten much earlier. In theory, one benefit of the new communication strategy will be to reduce volatility in the Treasury market, especially during periods when growth is surprising on the upside. Policymakers could use the rate projections to temper Treasury selloffs that risk prematurely tightening financial conditions and truncating the fragile recovery. However, it is not clear how the market will react to seeming inconsistencies between the FOMC statement and the rate projections, were they to persist and widen. The new policy could potentially backfire by adding uncertainty rather than reducing it. Still, investors should watch the Chairman as he will clearly continue to dominate Fed policy, no matter what happens with the rate projections.