Federal Reserve policy statement: Rate rise could come as soon as June as FOMC drops "patient"

 
Lynsey Barber
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Yellen and co' lose "patient" from meeting statement (Source: Getty0

The Federal Reserve could raise historically low interest rates as soon as June after the central bank revealed it was moving away from a pledge to be “patient”.

“An increase in the target range for the federal funds rate remains unlikely at the April,” said the Federal Open Market Committee's meeting statement, but leaving the prospect of a summer hike on the cards.

The committee repeated its view that the US job market had improved and gave its strongest signal yet that it could soon make its first rate hike since 2006.

"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 per cent objective over the medium-term," the statement said.

The committee has dropped its use of the word "patient" which it first picked up in December, as expected by the majority of economists, although officials still remain cautious.

Forecasts for growth and inflation were downgraded however, signalling to some that a rise in rates from the historic low of zero per cent would come later in the autumn.

The Fed's policy committee, which held its quarterly meeting over the last two days, stressed that no decision had yet been taken on a timing of the increase.

US shares rallied with the Dow Jones up one per cent and the S&P 500 inching 0.8 per cent higher and the euro rose against the dollar.

Here's what Berenberg's Christian Schulz had to say, also noting the Fed's acknowledgment of moderated growth, in particular, weakened export growth

Now, the Fed sees a first hike at the April meeting as unlikely, but beyond that it is open. That keeps a hike at the June meeting squarely within the realms of possibility. But the Fed offset the potentially hawkish signal this new guidance might send with much more dovish expectations about the future path of interest rates. The median FOMC member has lowered her end-2015 rate forecast from 1-1.25 per cent by half of a per cent to 0.5-0.75 per cent.

For end 2016, the median expectation declined from 2.5 per cent to 1.75-2 per cent, that is by virtually the same amount. The change suggests that the Fed will step on the monetary brake early, but initially more gently than it previously expected. As Janet Yellen put it: just because the Fed dropped the word “patient”, it will not necessarily become impatient.

The Fed’s lowered its growth forecast from 2.8 per cent year-on-year for Q4 2015 to 2.5 per cent and the same for Q4 2016, mainly because of a weaker outlook for net exports. Both seem on the weak side given the potentially strong effects cheap oil may have on consumption growth at least in the short-term. Upside growth surprises could lead to a steeper trajectory for the federal funds rate.

It would take a serious slowdown in the US now to prevent a first rate hike this year. June is a possibility for a first step, but the dovish forecasts are also consistent with a hike in July or September. We stick with our July call.

Here's the Fed's statement in full:

Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the committee judges consistent with its dual mandate. The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the committee expects inflation to rise gradually toward two per cent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the committee today reaffirmed its view that the current zero to 1/4 per cent target range for the federal funds rate remains appropriate. 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 two per cent 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 two per cent 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.

The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of two per cent. The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.

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