Counting on further improvement in the job market and rising inflation, the Federal Reserve Open Market Committee indicated it was moving closer to raising interest rates this year, though the changes likely won’t come for a few months, Bloomberg reports. Fed chairman Janet Yellen said the committee “would probably wait at least two meetings before raising rates. The next FOMC meetings are scheduled for April and June.”
At the same time, the Fed lowered its GDP growth estimates for the next three years, by 30 to 70 basis points, according to The Wall Street Journal. For example, the projections for 2015 dropped from growth of 2.6-3.0 percent to 2.3-2.7 percent. Estimates for GDP growth for 2016 have been changed from 2.5-3.0 percent to 2.3-2.7 percent.
"The central bank could conceivably do a June rate increase, but it will need to feel confident inflation will actually move closer to its target [2.0 percent],” WSJ wrote. “Who actually thinks that will happen? Certainly not bond investors. The Fed now projects inflation of 0.6% to 0.8% in 2015 and just 1.7% to 1.9% in 2016.”
WSJ also went through the entire statement issued at the meeting, comparing the changes in the language to statements from previous meetings. You can see the updates recorded here: http://blogs.wsj.com/economics/2015/03/18/parsing-the-fed-how-the-statement-changed-45/.
The Washington Post pointed out that the committee was careful in reassuring investors that even once employment and inflation rates reached levels deemed appropriate for an interest rate hike, the Fed would carefully evaluate the overall economic landscape before adapting any measures. According to the paper:
“In a survey of its own rate expectations, the 17 members of the committee indicated that their own forecasts for the federal funds rate were considerably lower than they were as recently as December.
Today, only four of the 17 said federal funds rates would be 1.125 percent or higher by the end of 2015 and seven of the 17 said the rate would be 0.625 percent or lower. In December, nine of the 17 said the Fed would raise the federal funds rate to 1.125 percent or higher.”
Likewise, Dan Greenhaus, of brokerage firm BTIG, told Bloomberg the important part of the Fed’s statement is not only that it dropped the word “patient,” but that it mentioned the agency will be looking for “further improvement in the labor market” before raising rates.
“We remain of the belief the Fed will first raise rates in September and view this statement, and the projection changes, and reducing the odds of a June hike,” he noted.
The Economist also wonders whether the Fed will actually go through with the increase once June rolls around.
“Inflation is well below the Fed’s target of 2%, and has fallen in the past year,” the magazine notes. “The dollar is strong. In recent months American exports have been sliding. A rate increase will reinforce all these trends, with knock-on effects around the world. It may put the brake on America’s economic recovery. The Fed has little to gain from tightening policy, but a lot to lose.”