The Federal Reserve issued its FOMC statement following its 2-day meeting yesterday and removed its "considerable period of time" language and replaced it with "patient". The Fed also released its "dots" or "target federal funds rate projections," which shows expectations of 4 rate hikes in 2015 and a median Fed funds target of 1.125% by yearend. (The Wall Street Journal notes that the estimates are 2.5% for 2016 and 3.625% for 2017.) Chair Janet Yellen also held a press release where she affirmed market expectations for a hike in the Fed funds target rate around mid-year in 2015. The FOMC statement says, "Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate.... Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable."

They explain, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely."

The FOMC adds, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy."

They explain, "The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.... The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Finally, the Fed writes, "Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements."

The WSJ article, entitled, "Fed Sets Stage for Rate Hikes in 2015," explains, "The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis. In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of "beginning to normalize the stance of monetary policy," the most direct formal reference to raising rates it has made in years."

While money market mutual fund yields won't move higher in earnest until the Fed moves, gross yields have inched higher in recent weeks, primarily due to the Fed's experiments with a higher RRP rate (which ended Monday). Last month, our Crane 100 Money Fund Index, an average of the 100 largest taxable money market funds, inched up one bps to 0.03%, its first increase since June 2013. The rate increases can't come soon enough for money market funds, who have been waiving billions of dollars a year in fees, charging on average just 0.13% vs. 0.37% at the end of 2008 when current the zero rate regime began.

In other news, Reuters writes "U.S. Fed awards fewest reverse repos in almost a year", which says, "The U.S. Federal Reserve on Wednesday awarded $31.78 billion of overnight fixed-rate reverse repurchase agreements to 23 bidders at an interest rate of 0.05 percent, the New York Federal Reserve said on its website. Wednesday's allotment was the smallest since Dec. 23, 2013, when the Fed awarded $28.76 billion to 31 bidders at an interest rate of 0.03 percent, according to Fed data. On Tuesday, the U.S. central bank allotted $40.72 billion in overnight reverse repos to 29 bidders, including Wall Street dealers, money market mutual funds and mortgage finance agencies at an interest rate of 0.05 percent."

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