FT Alphaville " Late-2014 and a problem of flexibility The S&P 500 has gradually climbed from 1310 at the time of the FOMC statement to about 1322 at pixel time, and at one point 5-year Treasury yields fell to an all-time low of about 0.76 per cent. They're now at 0.78 per cent. You already know that the Fed changed the date through which it would keep rates exceptionally low from mid-2013 to late-2014, but it's interesting to think about why the Fed decided to retain the language at all. In their preview to the meeting, part of which we posted earlier, Goldman Sachs economists actually predicted that the Fed would remove the language because the rate projections are meant to be a superior channel for providing guidance rather than a supplemental one. Here's why: [The rates projections] are more informative than the mid-2013 language because they provide an entire path for the funds rate, not just the timing of the first hike. They are more clearly conditional because the funds rate forecasts are published in the same document as the economic forecasts, which makes it very clear that changes in the latter would cause changes in the former. They provide a more natural avenue for acknowledging both uncertainty and disagreement within the committee, without forcing it to settle on the lowest common denominator. This is a key reason why we think that the projections will show the first hike in 2014, while the FOMC statement was only able to promise no hikes before mid-2013. Of course, Fed officials have said that even the mid-2013 language is not a full commitment; our view is that it is somewhere in between a commitment and a mere forecast. Here was their reaction immediately after the statement was released: At this point it is unclear how this statement relates to the forecasts for the federal funds rate that will be released at 2pm. However, it suggests that the median expectation of the committee may be lower than we had expected - indeed, a significant proportion of the committee may project the first rate hike in 2015 or later. And here was the reaction from RBC, which also makes the case that this limits the Fed's flexibility: Make no mistake, with changing 2013 to "at least through late 2014" this drives home one important fact: the Fed is scared. We are completely shocked at the Fed extending the extended period again. The brilliance of deciding to show when members thought it would be appropriate to lift the funds rate was building in flexibility. This meeting was an opportunity to rid themselves of the rigid language component and move forward with a more flexible approach (vis a vis their new Fed funds projections). But they have now locked themselves in to at least late 2014. Again, this shows you the level of worry at the Fed. This entry was posted by Cardiff Garcia on Wednesday, January 25th, 2012 at 19:01 and is filed under Capital markets. Tagged with FOMC.