Lower Oil Prices and Global Uncertainty Largely Ignored by the Fed… Hints of 2015 Tightening Persist

The Federal Reserve held their final meeting of 2014 last week followed by a press conference with FOMC Chair Yellen.  Included in the FOMC statement were materials detailing the committee’s expectations for the timing and level of interest rate hikes along with revised expectations for economic growth, employment and inflation.  The Fed is clearly pleased with the progress in employment, citing steady job gains in the U.S. over the past 12 months.  Their expectations for 2015 economic growth continue to be optimistic, foreseeing an economy that will expand more quickly than the long run average.  The largest question mark surrounding the day’s proceedings was inflation.  The drop in oil prices has caused the headline level of inflation and market-based inflation expectations to drop significantly.

The Fed recognizes this, but continues to view fluctuations in energy prices as transitory in nature.  Furthermore, the FOMC noted the consistent level of inflation expectations and the economic benefit to the U.S. economy as reasons not to worry about the drop in oil.  Should data continue to improve at a pace consistent with what we’ve seen in the past, the Fed expects to raise rates in mid-2015.  

Our take: as always, the Fed gives a lot of qualifiers when providing guidance.  As we’ve mentioned in recent market notes focusing on the economic troubles we are seeing overseas, even if the FOMC decides to increase the Fed Funds Rate next year, the so-called “bubble” in bonds is unlikely to pop. 

Sources: Federal Reserve