Posted on March 18, 2015

Today’s Federal Reserve Decision – Fed Not Impatient

Since that Federal Open Market Committee (FOMC) meeting, U.S. economic growth moderated a bit, but the labor market continued to improve. There has been a “strong gain in jobs” and the unemployment rate has now fallen to 5.5 percent, largely deemed to be close to full employment and well below the jobless rate in Canada, Europe and most other developed economies. Moreover, the rate is below the level posted when the Fed began to hike interest rates in June 2004.

US unemployment rate and FOMC initial rate hikes following recessions

The Fed sees the risks to the economy as “nearly balanced” with inflation rising gradually over the medium term as labor markets continue to tighten and the transitory effects of oil price declines dissipate. The important “patient” sentence is gone and replaced with a statement suggesting that an April rate hike is unlikely and the Fed will continue its careful analysis of the incoming data.

Specifically, the Fed said, “Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. 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.”

Only two of the 17 Fed officials think the U.S. central bank will not move later this year. In a dovish signal, Fed officials sharply revised down their expected path of interest rates this year and next, consistent with their reduced expectations for U.S. growth and inflation, as well as their reduced estimate 0f the lowest noninflationary unemployment rate.

A June rate hike appears to be far from certain. More likely, the Fed will raise rates at the September meeting. Janet Yellen said in her press conference that while the Fed has removed the word ‘patient’, they are not impatient. The central bank signaled a cautious outlook for economic growth and remains reluctant to move too quickly.

The fed funds rate, the overnight lending rate between banks, has been in this 0 to ¼ percent target range since December 2008. The last time the Fed hiked rates was in June 2006.

With the Bank of Canada having recently cut rates and the Fed poised for tightening, the Canadian dollar sank further today to below 78 cents U.S. Stocks vaulted after the statement release with the Dow Jones Industrial average reaching triple-digit gains on presumptions that a Fed rate hike will be delayed until at least September. The U.S. dollar fell on the news as the statement mentioned that export growth “had weakened.”