Fed Thoughts: A Riddle, Wrapped in a Mystery, Inside an Enigma

After delivering the policy firming on December 14th that was rooted in market expectation, the Federal Open Market Committee (FOMC) still had the capacity to surprise us all. How Fed officials triggered a sharp sell-off in financial market prices with a modest twist in the rate guidance of their Summary of Economic Projections (SEP) is a puzzle of Churchillian dimensions. The December package from Janet Yellen is a riddle, wrapped in a mystery, inside an enigma.

The Standish forecast before the Fed meeting was two quarter-point tightenings in 2017, with a not inconsiderable risk of a third, so the FOMC statement and SEP were not startling. Some realignment in the term structure was appropriate given the official shift from two to three moves (shown in the chart), but the bold-faced headlines and heated commentary probably owes to design failures in Fed communications (including the clunky nature of the SEP) and in setting policy.


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