The Fed’s policy statement released at the conclusion of yesterday’s meeting came as a surprise. While the Fed Open Market Committee (FOMC) did remove the word “patient” from its guidance on when the first rate hike might happen, it added additional language that suggests a rate hike won’t happen anytime soon.
In the very first sentence of the statement, the Fed begins (emphasis mine):
Information received since the Federal Open Market Committee met in January
suggests that economic growth has moderated somewhat.
That compares to “…expanding at a solid pace” in the January statement. This is an acknowledgement by the Fed that the growth in the economy has slowed down somewhat this year. This was the first indication that the Fed may hold off on the first rate hike.
Still in the first paragraph, the Fed goes on to say:
Inflation has continued to run below the Committee’s longer-run objective,
partly reflecting declines in energy prices.
And further:
Inflation is anticipated to remain near its recent low level in the near term…
Traders interpreted this to mean that the Fed wants to see inflation start to trend higher before it hikes the Fed Funds rate.
The statement made it clear that the Fed Funds rate will remain near zero:
…the Committee today reaffirmed its view that the current 0 to 1/4 percent
target range for the federal funds rate remains appropriate.
And in an unusual move of clarity, the statement said:
…the Committee judges that an increase in the target range for the federal funds
rate remains unlikely at the April FOMC meeting.
Perhaps the most important change in yesterday’s statement was the following:
The Committee anticipates that it will be appropriate to raise the target range
for the federal funds rate when it has seen further improvement in the labor
market and is reasonably confident that inflation will move back to its 2 percent
objective over the medium term.
This change in the forward guidance does not indicate that the Committee has decided
on the timing of the initial increase in the target range.
Most Fed-watchers interpreted this language to mean that there will also not be a rate hike at the meeting on June 16-17, since presumably the economy and inflation will not have reached the Fed’s benchmarks by then. As I have suggested recently, it now seems that the September meeting would be the earliest that “liftoff” would begin.
Some analysts, myself included, read yesterday’s statement to mean that the Committee has put its desire to raise the rate sooner rather than later on-hold until the economy improves and inflation shows signs of increasing.
While the Fed did not address it in the latest statement, many of us believe that the Fed is concerned with the surging US dollar, which I wrote about at length on Tuesday. If the Fed raises interest rates, that would add even more fuel to the dollar bull market.
Stocks and bonds soared higher just after the policy statement on the assumption that liftoff will not occur until at least September, if not even later. The US dollar moved lower on the news that rates won’t go up anytime soon.
The Committee also revised some of its quarterly economic projections. It lowered its GDP projection for 2015 from 2.6–3.0% to 2.3–2.7%. For 2016, it lowered GDP from 2.5–3.0% to 2.3–2.7%. It lowered its unemployment projection from 5.2–5.3% to 5.0–5.2%. The Committee significantly lowered its 2015 inflation projection from 1.0–1.6% to 0.6–0.8%.
So while the Fed removed the word “patient” from its forward guidance, as was widely expected, it seems clear now that the Fed will wait for improvement in the economy before considering the first rate hike.
As noted above, the markets were relieved.
So when will the Fed start to raise interest rates and by how much? I’d like to hear what you think.
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