Janet Yellen has spoken and the word was “hold.”
And not only that, the FOMC median forecast now only implies two rate hikes for 2016 versus four as the Fed’s own outlook converges on market expectations. The read through on the US economy was relatively benign but worries about global markets persist, and the very fact that that has become what certainly appears to be a deciding factor in these decisions speaks to the notion that the invisible “third mandate” is becoming more and more apparent with each passing meeting.
In any event, here’s Jon Hilsenrath parsing the latest statement from the “data-dependent” Fed as only WSJ’s Fed whisperer can.
Federal Reserve officials reduced estimates of how much they expect to raise short-term interest rates in 2016 and beyond, nodding to lingering risks to the economic outlook posed by soft global economic growth and financial-market volatility.
New projections show officials expect the fed-funds rate to creep up to 0.875% by the end of 2016, according to the median projection of 17 officials. That would mean two interest-rate increases this year, compared with four projected increases when officials last met in December, and implies the Fed is looking toward its next rate increase in June.
For now, the Fed is keeping its benchmark lending rate steady between 0.25% and 0.50%, after raising it a quarter percentage point in December. Without committing to a timetable, officials said the next move would depend on “realized and expected economic conditions” and reiterated that it plans to move gradually.
The central bank sees the fed-funds rate at 1.875% by the end of 2017 and 3% at the end of 2018, also lower than the last quarterly projection officials released late last year. In the long run, the Fed expects its benchmark rate to reach 3.25%, less than the 3.5% rate it saw in December.
“Economic activity has been expanding at a moderate pace despite global economic and financial developments in recent months,” the Fed said in a policy statement released after its two-day meeting.
However, in a closely watched section of its policy statement, it added that market developments and the global outlook “continue to pose risks.” This risk assessment is important because it indicates whether the Fed is leaning toward raising rates, holding them steady or reducing them.
In January, officials declined to make an assessment of risks to the economy, a sign of their uncertainty about the impact of slow global growth and volatile
financial markets. The latest statement on risks suggests officials are inclined to wait until they have a clearer picture of the outlook before moving. That makes an April move a high hurdle, though not impossible.
The Fed’s economic projections were a bit more pessimistic about economic growth, but more optimistic on unemployment.
Fed officials said they expected economic output to expand by 2.2% in 2016, 0.2 percentage point less than they projected in December. They see growth of 2.1% in 2017, which is 0.1 percentage point less than previously expected, and 2.0% growth in 2018, in line with earlier projections. Slow growth overseas has hurt U.S. exports and may have been a factor in the reduced estimates.
Despite anemic output growth, the economy has continued to produce jobs, in part because firms are hiring more workers to compensate for soft worker productivity growth. Fed officials expect the pattern to continue. They see the jobless rate retreating to 4.7% by the end of this year and 4.5% through 2018, lower than previously expected.
“A range of recent indicators, including strong job gains, points to additional strengthening of the labor market,” the central bank’s policy statement said.
While the outlook for jobs and output growth is mixed, the outlook for inflation holds its own uncertainties. Fed officials projected inflation would rise 1.2% this year, that’s less than previously projected largely because of soft energy prices and because a strong dollar has put downward pressure on import prices. The Fed sees inflation starting to rise as oil prices and the dollar stabilize. Inflation is projected to reach 1.9% by the end of 2017 and to finally reach the Fed’s medium-run goal of 2% by the end of 2018. Officials see core inflation, excluding food and energy, at 1.6% by year-end, then 1.8% in 2017 and 2.0% in 2018, largely in line with earlier expectations.
The central bank was particularly preoccupied before the meeting with changes in inflation expectations. Market and survey measures had sagged in
January and February but more recently show signs of stabilizing. Data released ahead of Wednesday’s statement showed consumer prices fell in February due to a slide in gasoline prices, but other evidence pointed to steadily building inflation pressures. The consumer-price index showed core prices-excluding food and energy prices-climbed 2.3% in the year through February, notching the largest 12-month gain since May 2012.
“Inflation picked up in recent months,” the statement said, “however it continued to run below the [Fed’s] 2% longer-run objective, partly reflecting declines in energy prices and in prices for non-energy imports.” Market measures of inflation expectations “remain low,” the Fed said, and survey measures were “little changed, on balance.” Taken altogether, the central bank demonstrated little change in its outlook for inflation, but it said it was monitoring inflation “closely,” another sign of its trepidation.
The central bank’s new rate projections put its own expectations more in line with expectations in financial markets. Ahead of Wednesday’s release, futures market participants put a 35% probability on one additional rate increase this year and a 30% probability on two. A recent Wall Street Journal survey of 64 business and academic economists found they expect two quarter-percentage-point increases in the fed-funds rate this year, down from the three rate increases they predicted in December, and three increases in 2017 instead of four. Before the release, Fed officials had consistently predicted a steeper rate path than the market.
The Fed’s pledge to gradually continue increasing interest rates is in contrast to expansionary monetary-policy paths in other major economies. The European Central Bank last week ramped up stimulus and cut interest rates deeper into negative territory to bolster the eurozone’s fragile economy, weeks after the Bank of Japan introduced negative rates for the first time to ward off deflation.
The Fed’s decision to wait longer for more clues on the domestic economy’s path follows circumspect statements from senior policy makers in recent weeks.
Federal Reserve Chairwoman Janet Yellen told lawmakers in testimony last month that financial conditions “have recently become less supportive of growth,” hinting to Congress that the central bank had increased trepidation over the path of interest-rate increases.
Kansas City Fed President Esther George cast a dissenting vote Wednesday, the first at a meeting of the central bank’s rate-setting Federal Open Market Committee meeting since October, when Richmond Fed President Jeffrey Lacker objected to a then-decision to hold rates steady. She wanted the Fed to raise rates a quarter percentage point.
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