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Economic Update


September FOMC Meeting: Zero Is Still the Right Answer

September 17, 2014

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The Federal Open Market Committee (FOMC) closed its monetary policy meeting today by
reaffirming its current course and its expectations for the future. No changes in interest rates
are imminent, but the statements and forecasts released today help to clarify the timetable for
policy normalization.

Much of the speculation going into the meeting centered on whether the Federal Reserve would
remove the language in its communiqué pledging to keep interest rates near zero for “a
considerable time.” That wording remained. Labor market conditions were characterized as
improving further, but “significant underutilization of labor resources” remains. Inflation
remains very muted (consumer prices fell overall in August), completing the case for continued

Two voters – President Charles Plosser of the Philadelphia Fed and President Richard Fisher of
the Dallas Fed – dissented from the decision. They have been on record as suggesting that labor
market slack is less than acknowledged and that risks to inflation and financial stability are
somewhat greater.

Interestingly, the forecasts released by the Fed today suggest that the days of zero interest rates
may be numbered.

The central tendency in the FOMC’s combined forecast indicates 2014 growth in real gross
domestic product (GDP) of 2.0% to 2.2%, down slightly from the June projections. Forecasts of
real GDP growth for the next three years are somewhat above the long-run potential of the


The unemployment rate was nudged down marginally from the June forecast.  The jobless rate is projected to touch the long-run level during 2016 and edge a bit lower in 2017.  Inflation forecasts show insignificant changes, with the 2.0% target likely to be satisfied in the long run.  

The Committee introduced a change to the “dot chart” that now includes the mid-point of the range of the federal funds rate forecast consistent with its indication that it will continue to maintain a range for the target federal funds rate. 

The median federal funds rate is expected to reach 1.375% at the end of 2015, and 2.875% by end-2016, which are both slightly higher than the June forecast.  The projected long-run federal funds rate held unchanged at 3.75%.  Market expectations of the federal funds rate are less aggressive than the Fed’s view. 

Although tightening of monetary policy is not imminent, the Fed published a statement of policy normalization.  The Committee expects to end the policy of reinvestment on its portfolio of securities only after it begins increasing the federal funds rate, with the timing tied to the evolution of economic data and the economic outlook.  The July FOMC minutes suggest that rate on the overnight reverse repo program will be set equal to the floor of the range on the federal funds rate, and interest on excess reserves will be set equal to the upper end. 

We continue to think that the Federal Reserve will move very cautiously in considering rate increases.  It will want to be trebly sure that reversing its course of six years won’t uproot what seems to be a solid American expansion.  And geopolitical risk remains a significant downside.  Our call remains that the first increase in interest rates will occur late in the summer of 2015, and that expectations for year-end 2015 seem a little overdone.


The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.