Global Daily – Fed expects slower path for rate hikes

by: Maritza Cabezas , Georgette Boele

Fed forecasts slower path for rate hikes this year, in line with more conservative economic projections and the view that global economic and financial markets still pose a risk. We expect rates to remain on hold in the coming months.

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Fed forecasts slower path for rate hikes this year

Fed policymakers left rates unchanged at the March meeting as was widely expected. Official projections for the federal funds rate showed that the Fed scaled back its expectation for rate hikes to two quarter point increases this year from four forecasted in December, when the rate hike cycle started. This leaves the median forecast now at 0.9% in 2016 down from the  1.4% indicated in December.

 

Fed now closer to markets

The Fed is now signaling a more accommodative monetary policy path compared to December. This moved the Fed closer to market expectations of one rate hike this year. However, Chair Yellen mentioned during the press conference that this was not a commitment and remained dependent on how economic conditions would unfold. We expect rates to remain on hold in the coming months. This reflects the view that economic growth will be modest and wage growth subdued. In addition, early Fed hikes could unsettle markets.

 

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Economic projections more conservative

The Summary of Economic Projections, showed downward revisions to GDP growth and inflation this year, while core inflation and unemployment were unchanged. Chair Yellen mentioned during the press conference that Fed policymakers took into account the rising core inflation in the past couple of months, but they saw this as the result of exceptional factors or one-offs, while they though that risks to the inflation outlook were balanced.

Risks to global economy remain

Fed policymakers continue to see risks to the global economy and from financial developments. However, the phrase which mentioned that they will ‘assess the implications for the labour market and inflation and for the balance of risks to the outlook’ was eliminated. The Fed Chair mentioned that although risks have diminished, the global economy was slowing. This made it difficult for FOMC policymakers to make a uniform assessment of risks to the outlook, which were considered ‘balanced’ in December when the Fed started to hike rates.

Market reactions

Financial markets reacted very positively to the downward adjustment in the dots plot. The US dollar fell across the board. EUR/USD rose back above 1.12 while USD/JPY fell below 113 again. In general emerging market currencies reacted positively to the Fed communication, recovering from earlier weakness. Oil prices remained supported, while gold prices jumped 30 USD to 1260 again. US Treasury yields dropped, while equity markets rose.