The market acted surprised this morning when the Fed statement came out more “hawkish” than the last one, but they shouldn’t have.
Changing the statement to read that there were “solid job gains and a lower unemployment rate” instead of “the unemployment rate is little changed,” and adding that there has been a substantial improvement in the labour market, is a statement of the obvious.
If the Federal Open Market Committee did not change its stance this morning, you’d be wondering what they’ve been smoking.
But nevertheless, the fact that the FOMC has finally, and completely, acknowledged that the US economy is out danger makes this one of the most significant monetary policy statements for years – a game changer.
The US dollar shot up by almost a full euro cent and the Aussie dollar instantly dropped from US89c -- its highest level for more than a month -- to US87.8c. Sharemarkets also jerked up on the news.
The steady, and now entrenched, recovery in the US labour market means that the only potential cloud on the horizon is low inflation, which is turning out to be a big problem in Europe.
On that subject the Fed’s statement this morning said: “Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.”
So no problem there either.
An interesting development this morning was that, unusually, the Fed effectively shifted monetary policy without a press conference, which left the markets no choice but to simply pore over the statement rather than interpret the less calculated words coming out of Janet Yellen’s mouth.
It’s a small point, but it means that the reaction to the statement is likely to develop in the days ahead.
At a guess, I’d say the reaction will get more bullish.
Although the changes to the statement from last time look incremental, in fact it marks the moment when the Federal Reserve became unreservedly bullish for the first time -- when the caution and the qualifiers were removed and the Fed said clearly that things are getting better.
And unlike Australian monetary policy statements, there was no mention this morning of global economic weakness, or of Europe’s problems.
Some economists have this morning taken this to mean that the Fed believes that the US has decoupled from the rest of the world and that monetary policy there can be entirely set according to domestic issues.
Not that US policymakers ever take much notice of what’s going in the rest of the world, but over the past few years the slowing of both China and Europe has had a big impact on both the US economy and financial markets. Not any more.