Federal Reserve Chair Janet Yellen during a House Financial Services Committee hearing in February. (Photo by Mark Wilson/Getty Images)
At their second meeting of 2016, FOMC members maintained a 0.25% to 0.5% target range for short term interest rates, and dialed back their projection for further hikes this year after raising benchmark rates a quarter point in December.
The overwhelming belief among economists is that the Fed will raise rates this year, continuing on the path laid out in late 2015, when the Fed hiked from an effective rate of 0% for the first time since the financial crisis. The newstatement doesn’t change this general outlook, but the questions remain—when will that first hike be? And how many times will they move after that?
New projections from committee members, released with the policy decision, offer the nearest thing yet to answers to the latter question. They put rates at 0.875% by the end of 2016, suggesting two further quarter-point hikes before the end of the year. This is down from 1.375%, signaling four hikes, in the December forecast.
In her post-meeting press conference Chair Janet Yellen, explained that ratcheting down this way: “Most committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require a somewhat lower path for policy interest rates than foreseen at that time.”
Leading up to Wednesday, observers agreed the next move was more likely for June than at the Fed’s meeting next month, though April appeared to still be in play. (In the hours before the Federal Open Market Committee’s latest policy decision was made public Wednesday, Fed Funds futures trading peggedthe probability of a March rate hike at 0%.) The new projections may take April off the table entirely and moves the Fed closer to market expectations.
Stocks reacted favorably to the news. The S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite all turned comfortably positive following the announcement, after dipping into negative territory earlier Wednesday. Traders will listen closely for timing clues during Chair Janet Yellen’s post-meeting press conference for further clues to how the Fed is interpreting incoming economic data.
“There is going to be a strong discussion of the data at all meetings. This year is going to be distinct from the previous eight years, in that each meeting does have the possibility of being a live meeting to discuss a rate hike. The issue is going to be the pacing and the amplitude,” observed Stephen Wood, chief market strategist and Russell Investments in an interview Tuesday.
So what is the data saying right now?
It was generally agreed, that the latest jobs numbers came in more than strong enough to support a hike, with 242,000 jobs added to payrolls last month and the unemployment rate at 4.9% for the second month in a row. The Bureau of Labor Statistics also revised payroll counts from the prior two months higher. Even wages, long stagnant despite consistent hiring, have begun moving higher. In its statement the Fed described the labor market as “strengthening.”
Meanwhile, inflation is showing signs of stabilization and even of picking up toward the Fed’s 2% target. “Whether it is core inflation or headline inflation, we are seeing the effects of low energy prices fading from year-over-year comparisons and we are starting to see gradual gains. The Fed wants to see that,” noted Gus Fuacher, deputy chief economist at PNC. “That’s a factor that would give Fed the confidence to raise rates later this year.” Core personal consumption expenditures currently stands at 1.7%, this is the Fed’s preferred inflation measure and strips out volatile food and energy prices.
Broadly the Fed likes what it seems from the domestic economy but reiterated concerns about the global economy in the March statement. Noting: “The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks.”
“At its meeting in late January, the FOMC suspended its normal balance of risks assessment over concerns about tighter financial conditions and downside risks to growth,” wrote Goldman Sachs’ economists in a research note distributed earlier this week. Given the lowered rate outlook, Yellen, who has long said that the Fed will be data dependent, it seems may now be more concerned international and market risks, than to U.S. employment and inflation.