Sept 16-17 '04 FOMC Meeting

In a Nutshell: "... a range of labor market indicators suggests that there remains significant underutilization of labor resources."

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

Quantitative Easing Decision: Bond purchases reduced by $10 billion to $15 billion. Quantitative easing is expected to end at the next meeting.

One again, the FOMC and Janet Yellen tried to provide some clarity about how the monetary authorities will proceed with rate hikes when they eventually come. And again, we did not get much that was new.

On the economic front, the economy continues to improve but there remains a significant amount of slack in the labor market. That was Chair Yellen's reason why wages are showing little change. It is all about a tight labor market and the Fed doesn't see that situation occurring soon. As it does four times a year, the FOMC released the members' forecasts for growth, inflation and unemployment rates. The central tendency of the forecasts puts full employment in the 5.2% to 5.5% range, which is not expected to be reached until sometime in late 2015 or early 2016. However, the members are a bit more optimistic about pace of decline in the unemployment rate.

As for when the Fed might tighten, those who thought that the FOMC might signal that rates could rise sooner rather than later were disappointed. The Fed Chair made it clear that she was in no hurry to raise rates. But she also noted that the decision is not "calendar driven" but is "data driven". The hawks are not making very much inroads into Fed policy.

Finally, the Committee went over procedures for normalizing policy. One new thing was that the FOMC would be targeting rate ranges rather than a given rate. That may be reflection of the concern that transitioning to a normal Fed policy and a normal Fed balance sheet will likely have some bumps in the process. It would be amazing if the Fed pulls off the normalization process without any hiccups.

So what should we make of all this? Janet Yellen is firmly in command at the Fed and we should stop doubting it. She is a dove and until the data make her think differently, she will run monetary policy accordingly.

But I have some issues with the Fed's forecast. The unemployment rate has declined by about 0.7 percentage point for the past three years yet the members think the decline will slow sharply starting in 2015 and only edge down in 2016 and 2017. Yet growth is expected to be a lot stronger over the next two years than it had been. This doesn't seem to be consistent. But it is necessary for the members to argue that the funds rate will not be increased soon and will not be raised quickly, which they seem to be indicating.