Still patient, but for how long?

By G.I. | WASHINGTON, D.C.

For those watching the Federal Reserve's meeting which ended today, no news was good news. The Fed, as expected, said it would end its bond buying programme (also known as quantitative easing) next month. Many in the market wondered if it would then signal a relatively brisk move to raise interest rates from near zero, where they have been since 2008. It did not: it said rates would stay there for a "considerable time" after bond-buying ended, provided the economy behaves as expected. It also reiterated that "there remains significant underutilization of labor resources," suggesting it is not inclined to hurry up the process of raising rates.

But if the statement was, on its face, reassuring, the following press conference and the projections released by Fed officials suggested markets should not put too dovish a spin on the Fed's actions. Ms Yellen was pressed by reporters on the meaning of "considerable time." Markets assume it means about six months, in other words, no rate hike before next April. But Ms Yellen emphasized that it had no mechanical interpretation, and more important, that it did not bind the hands of the Fed. The phrase, she said, provides "flexibility" and markets need to understand that considerable time is "not some firm promise about particular amount of time." In other words, if the data change, the Fed will have no compuction about raising rates sooner than "considerable time" might imply.

Thus far, the data have not moved in a direction that has the Fed itching to raise interest rates sooner. Indeed, this morning inflation came in softer than expected, with the core CPI rising just 1.7% in August from a year earlier. That implies the core PCE price index, which the Fed watches, would rise only about 1.4%, according to Morgan Stanley, well below the Fed's 2% target.

But the quarterly projections of the Federal Open Market Committee's 17 members had a more hawkish tilt. They lowered the projected path of unemployment over the next three years, and the path of real GDP. Though the changes were small, they come after repeated revisions in the same direction this year. If the economy is growing more slowly and unemployment falling more quickly than expected, than economic potential must also be growing more slowly, and the output gap closing more quickly. "We have had donward revisions to the level of potential output and for a time its projected pace of growth," Ms Yellen acknowledged. "That tension has been there."

Ms Yellen didn't say so, but the repeated downward revisions to the output gap also militate for a faster pace of rate normalization than previously, and that probably explains why FOMC members have raised the expected path of interest rates; the median projection for the Fed funds rate at the end of 2015 is 1.375%, up from 1% in June; and at the end of 2015 it's 2.875%, up from 2.5%. (The use of eighth-point ranges is new, and reflects the imprecision of setting rates when QE has left banks awash with trillions of dollars of unneeded reserves.) By the end of 2017, they see the rate at 3.625%, not far from its long-run level of 3.75%. This suggests the market, which already had a lower path for Fed tightening than the previous projections implied, is even further out of sync with the Fed. Asked about this, Ms Yellen said this was not necessarily due to any confusion on the market's part; it may simply have a different forecast from the Fed. The unstated message is that as the data come in, the market will have to start seeing the world the way the Fed does.

The one glaring exception to this otherwise hawkish picture is inflation. True, the FOMC slightly marked up its path over the next two years, but the central tendency remains firmly below 2% both this year and next. Indeed, not once does the top of the central tendency exceed 2% out to 2017, while the bottom of the range is anywhere from 1.5% to 1.7%. This is, frankly, odd. These projections are based on the assumption that the Fed will pursue "appropriate monetary policy". Why do so many officials believe appropriate policy leaves inflation below target? It may be that that is the most realistic forecast of how fast inflation can move up from its current level; but it also reflects the deep seated aversion among Fed officials to explicitly planning for inflation to overshoot. (This is not universal; someone has inflation hitting 2.4% in 2015, but that official is an outlier.) The Fed has warned that interest rates chould rise faster than the market expects. It hasn't made a convincing case that they should.