Economic Update

FOMC Statement – March 2015

The results of this week’s FOMC meeting are largely as I had expected. The Fed acknowledged the recent weakness in economic data and lowered their description of economic activity from “solid” to “moderate.” They continue to expect the current below level trend of inflation to be transitory. Forward guidance was modified with the removal of the descriptor “patience” and so data dependence will guide future policy.

Included in this meeting was the release of their most recent forecast summary – growth, inflation and unemployment forecasts were all reduced, again. For the first time, they recognized the strength of the dollar and its negative impact on growth. Most important, they also revised their interest rate projections downward indicating a later date for the “liftoff” of rates and a slower pace once they begin.

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 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.”

So, when will rate hikes begin? The FOMC made this statement:

“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.”

What does reasonably confident mean? I’m not sure. Another ambiguous term from the Fed. But, currently, the inflation and growth data are weak and point to a later lift-off, and weighting the expectations for a rate hike at a later date seems appropriate and is consistent with my expectations. The markets have reflected the changes in Fed forecasts with Fed Funds Futures contracts changing for September. There is now a 50% chance of a September hike built into the futures contracts, down from a 75% chance prior to the Fed’s announcement.

The Fed has succeeded in their goal of transitioning from aggressive accommodation to normalizing policy without excessively disrupting markets. They have moved the Fed both closer to and further from the first rate hike. With their changes to forecasts and the language of this statement they acknowledge that they are willing to let this recovery continue. The latest data continue to point to an economy barely above stall speed and they have no intention of prematurely creating a stall. Aggressive policy moves are still far, far away.