In her testimony before both the Senate Banking Committee and the House Financial Services Committee, Federal Reserve Chair Janet Yellen indicated that the Federal Open Market Committee (FOMC) would be dropping the key term “patient” from its next monetary policy statement. Yesterday, the FOMC made good on that pledge.
Instead of assurances that the Fed will remain patient, the FOMC gave us this to chew on (Emphasis added):
“In determining how long to maintain this target range, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. 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.”
In other words, the FOMC is saying that a rate hike could come in June, but it’s not making any promises.
Challenges for the FOMC
The FOMC is facing a variety of challenges as it prepares its monetary-policy plan. The U.S. economy has been growing, but the stability of that growth is still in question — especially since the rest of the global economy has yet to show up in any type of meaningful supporting role. Chinese growth has slowed, European growth has slowed and the Russian and Japanese economies are also struggling.
This is how the FOMC phrased its concerns in today’s statement (Emphasis added):
“Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat.”
Many wonder what will happen to the U.S. economy if the FOMC raises interest rates. Even the Fed is concerned about slowing growth.
In addition to its monetary-policy statement, the FOMC released its updated economic projections. At its December meeting (the last time the FOMC released projections), the Fed believed the U.S. economy would grow between 2.6% and 3% in 2015. Now, the Fed anticipates growth between 2.3% and 2.7%.
At the same time, the Fed is worried about the potential for runaway inflation. However, none of this potential inflation has materialized in the U.S. economy. Looking at the updated economic projections, the FOMC now anticipates inflation for Personal Consumption Expenditures (PCE) for 2015 to come in between 0.6% and 0.8% — compared to an increase of 1% to 1.6% at its December meeting.
Sure, the potential for inflation is still there, but it’s hard to risk raising interest rates and squashing future economic growth to combat the something nobody can see happening this year.
Stocks jumped after the statement was released. The fact that the FOMC doesn’t have a set date to raise rates but is going to take a “wait-and-see approach” instead has given traders confidence that the weak economic data we’ve been seeing lately may cause the Fed to sit on its hands for a while.
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