Federal Reserve Stays Dovish on U.S. Strength as Bundesbank Warns of QE Failure

Interest rates may not rise in 2015 as the Federal Reserve indicates it will be more patient before making its first rate hike since the global financial crisis of 2008.

The Federal Open Market Committee said in a statement Wednesday that it “can be patient in beginning to normalize the stance of monetary policy,” a signal that many analysts had been expecting that falling oil costs caused inflation to become a minor concern for the policymakers. 

Interest rates may not rise in 2015 as the Federal Reserve indicates it will be more patient before making its first rate hike since the global financial crisis of 2008.

The Federal Open Market Committee said in a statement Wednesday that it “can be patient in beginning to normalize the stance of monetary policy,” a signal that many analysts had been expecting that falling oil costs caused inflation to become a minor concern for the policymakers. 

Wednesday also saw a release from the Cleveland Federal Reserve showing that inflation has fallen, with more categories of goods seeing price declines. The ‘trimmed-mean’ Consumer Price Index rose 0.1% in November, which is about 1% annualized. The seasonally adjusted CPI for urban consumers was lower in November, at 0.3% or 3% annualized. The CPI minus food and energy (core) costs rose 0.1%.  Core CPI’s 1.8% annualized rate in 2014 is the lowest since 2010.

The largest fall in prices continues to be energy costs.  Motor fuel fell in November at an annualized 55% rate.

Germany Shrugs at Deflation Fears

While inflation is lower in the United States and the Fed is signaling a more accommodative monetary policy without asset purchases, German policymakers have shrugged off the threat of deflation in another public statement dismissing the efficacy of quantitative easing.

Head of the Bundesbank Jens Weidmann criticized quantitative easing as an ineffective tool for stimulating growth, reiterating earlier comments. Analysts follow Weidmann’s comments closely, because European Central Bank Mario Draghi has indicated the bank is doing “whatever it takes” to fight deflation, with the likelihood of a broader QE program becoming accepted amongst analysts.

However, Weidmann’s frequent criticisms suggest the Germans will attempt to tie the hands of the ECB and keep Eurozone monetary supply growth limited. The ECB has so far refrained from a broad asset-purchasing program, although it did purchase low-risk bonds and asset-backed securities in a few small auctions. These have had no measured impact on deflation in Europe yet, which has led some to speculate the ECB will make a more aggressive argument for monetary expansion to the Bundesbank in 2015.

Meanwhile, QE programs have had modest success in Japan and the United States, where avoiding deflation and a modest economic recovery resulted in a falling unemployment rate and rising consumer confidence. Japan’s Prime Minister Shinzo Abe won a recent referendum that indicates the Japanese people support the Abenomics policy of aggressive monetary stimulus.

Employment Buoyant

Part of America’s economic recovery in 2014 has been an improvement to the unemployment rate, which has fallen to below 6%, expects to fall further in 2015. In its meeting, the FOMC said it sees more, faster progress towards full employment and that it will continue to reinvest interest payments from its bond portfolio to provide greater liquidity that, in theory, will drive additional direct investment in business activities.

In recent months, employment growth in the U.S. has slowed faster than expected, and some analysts believe greater consumer spending because of lower energy costs will encourage employment growth in the future, as businesses expand to meet growing demand.