(Washington, DC) The Federal Reserve Bank maintained a dovish stance and held the line on interest rates with the Federal Open Market Committee (FOMC) approving the decision 9 to 1. Only the Kansas City Fed's Governor Esther George dissented; she alone pushed for a rate hike at the meeting.
In prepared notes at the Economic Club of New York, Chairwoman Janet Yellen noted the global forces and challenges in direct opposition with current policy while she urged a slow rate pace stressing caution.
Yellen effectively scaled back expectations in regards to further moves ahead while speaking to recent readings on the strength of the U.S. economy, in spite of the unprecedented volatility beginning this year. In the FOMC statement, the committee referenced "global and financial developments continue to pose risks,". However, all major U.S. indexes turned positive with Treasury yields hitting multi-week lows after the release of the Chairwoman's remarks—notably both stocks and gold rose on Yellen's statements.
This is significant because the U.S. central bank at its December meeting projected four rate hikes in 2016, recent estimates effectively reduced the number to two. Projections from the Federal Reserve projections earlier this month showed that the majority of officials — 9 of 17 — anticipated only two hikes in 2016.
In addition to the two rate hikes this year, the FOMC only projects two hikes in 2017, according to the most recent Summary of Economic Projections. Consequently, the Fed cut its GDP growth outlook for 2016 from 2.4 percent to 2.2 percent and reduced the 2017 outlook from 2.2 percent to 2.1 percent. The current interest rate target is 0.25 to 0.5 percent, Fed minutes show that last December officials had expected the upper level to rise to 1.4 percent by the endow the year. Given the new projections, the FOMC now expects a weaker 0.9 percent funds rate in 2016 and a 1.9 percent level by the end of 2017, reflecting cuts of half a percentage point. The Fed also reduced expectations for economic growth and inflation.
There was a considerable shift lower in the latest estimates, however it would be incredibly difficult to raise rates when the European Central Bank (ECB) and The Bank of Japan (BOJ) are utilizing negative rates.
A short list of factors contributing to the Fed's outlook on rates are the following:
1) Financial conditions have recently improved
2) International economic growth is slowing down.
3 Mortgage rates and corporate-borrowing costs have fallen
4) Labor market participation strengthened
5) Inflation is rising slowly
A notable influence on inflation is the low price of oil. Yellen stated that she doesn't expect oil prices to rise to the pre-crash levels, but to stabilize. If the price of oil increased to $50, Yellen stated that the Phillips curve — which tracks the relationship between unemployment and inflation — is still relevant and applicable.
Market participants reacted strongly and risk addiction to the extra-ordinary measures in regards to investment decisions. However the Fed must balance its mandates of currency control, financial stability and monitoring inflation while maintaining its independence as there begins a clamor for control by Congress. The question of inflation is uncertain due to the risks of economic growth.
The Federal Reserve could raise interest rates again as soon as its April meeting, which will be a live. There isn't any scheduled press conference and that casts some doubts on whether the Fed could hike.
However if the economy falters, Yellen added, the Fed can "provide only a modest degree of additional stimulus." Although uncertainty seems to be looming, there is one certainty Investors can expect: easing will be far less effective in the future.