January FOMC Update
What a way to start the New Year, financial market chaos around the globe, FOMC meeting, a months’ worth of economic data and release of US 4th Quarter GDP. Almost all of it, other than December jobs, negative. The 4th Quarter US GDP data indicated expansion of 0.7% resulting in full year growth of only 1.8%; another disappointing year. All measures of inflation continue to point to deceleration.
As expected, the FOMC held steady this week. They reaffirmed their basic forecast, but recognized current global economic and financial economic uncertainty. That is all that should have been expected. Look at the changes to the opening paragraph, best of luck interpreting this:
The Fed wasn’t expecting miracles, but now they have slow GDP growth, fast employment growth and inflation below their benchmark with uncertainty in the financial markets. Good Luck with that. And to make matters worse, global economic growth is really struggling. Just today, the Bank of Japan surprised markets with a move to negative interest rates and stated they would make more cuts if necessary. In addition, this week the European Central Bank and Peoples Bank of China both made moves to stimulate their economies and boost inflation. It seems the global fight to boost growth and inflation is alive and well.
The Fed’s December forecast for fed funds rates called for at least four hikes this year. As we begin the year, this forecast is already in doubt. Markets are currently forecasting one hike for 2016. The Fed got lucky this month. They weren’t expected to do anything, which takes the pressure off. But in March they might have a real decision to make. We have only six weeks of data to digest. Even assuming that labor markets hold solid, will that be enough? Doubtful. They will need more. I still expect rates lower for longer.