The Fed’s Policy Statement and an Elliott Wave International Perspective

Here's how CNBC summed up the Fed's latest policy statement (Sept. 16):

Fed holds rates steady near zero and indicates it will stay there for years

The Federal Reserve kept its pledge to keep interest rates anchored near zero and promised to keep rates there until inflation rises consistently.

As the central bank concluded its two-day policy meeting Wednesday [Sept. 16], it said short-term rates would remain targeted at 0%-0.25%. Officials also changed their economic forecasts to reflect a smaller decline in GDP and a lower unemployment rate in 2020.

Projections from individual members also indicated that rates could stay anchored near zero through 2023. All but four members indicated they see zero rates through then. This was the first time the committee forecast its outlook for 2023.

In addition, officials addressed a new policy regime in which the Fed will allow inflation to run somewhat above the 2% target rate before hiking rates to control inflation.

"These changes clarify our strong commitment over a longer time horizon," Chairman Jerome Powell said at his post-meeting news conference.

The policymaking Federal Open Market Committee adopted specific language to emphasize the inflation goal.

"With inflation running persistently below this longer run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved," the post-meeting statement said.

After the market close on Sept. 16, Elliott Wave International Chief Market Analyst Steve Hochberg offered this perspective on the Fed in the three-times a week U.S. Short Term Update, a publication which provides near-term forecasts for major U.S. financial markets:

"The Fed's New Policy Framework Justifies Stocks' Gains," said the headline to a Bloomberg blog this afternoon. What's the new "framework" and why does it justify "gains"? The Fed says it wants to keep rates at zero until inflation is running at moderately above 2% for some time. The Fed has been trying to create 2% inflation for nearly 10 years and has completely failed. The Fed's favorite way to measure inflation is via the U.S. Personal Consumption Expenditures Price Index. ... The PCE is currently at 1%. Since March 2009, the end of the Great Credit Crisis and approximately the time the Fed pledged 2% inflation, the PCE has been at or above 2% for just 30 out of a total of 136 months, or less than a quarter of the time. Since the Fed dropped the Fed Funds rate to essentially zero in March, the PCE has never been above 2%. How is this possible? Because the Fed does not control the market or investors. Instead, the Fed is part of the social fabric of aggregate mood. Social mood has been transitioning from ebullience to a more pessimistic milieu. ... When negative mood becomes dominant, no amount of Fed easing will matter. Investors will pull back from buying, consumers will retrench in their borrowing and spending habits, music will become edgy, fashion will turn dark, horror movies will become popular and much more. Not only will investors not care that rates are zero, but they will become agitated and angry at the Fed for decimating the non-interest on their savings accounts. When deflation gains traction, the entire notion of a Federal Reserve will come into question. It's all ahead.