Fed Lost ‘Patience’, Yet Softer Outlook Suggests Rate Hike Unlikely in April and June

The Fed removed the ‘patient’ language in the March FOMC meeting statement. However, downward revision of the economic assessment has made the overall message more dovish than expected. The Fed noted that economic growth to have ‘moderated somewhat’, compared with January’s ‘economic activity has been expanding at a solid pace’, with weakening of exports growth as part of the factors causing the moderation. It was also unveiled in the staff economic projection that both GDP growth and core inflation forecasts were revised downward for 2015 and 2016. Note, in the reduction in the long-run unemployment forecast, that the Fed now sees no inflationary pressure on the economy even if the unemployment rate falls to as low as 5%. On the rate hike schedule, the Fed noted explicitly that there would be no rate hike in April. While Chair Janet Yellen stated that she could not ‘rule out’ a rate hike in June, the tone of the statement and the downgrade of economic projections suggested that the first rate hike would come in September the earliest, rather than June.

The date-dependent forward guidance has been removed with the original language: ‘Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy’ replaced by the followings: ‘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.’

Another point to note in the policy statement is addition of the reference that ‘export growth has weakened’, reflecting the impact of the recent appreciation in the US dollar. The new set of economic projection suggested that headline PCE inflation was revised lower mainly in 2015 as a result of energy price decline. Estimates for 2016 and 2017 stayed unchanged. Core PCE inflation in 2015 and 2016 was revised lower, whilst the 2017 estimate stayed unchanged. The revision was due to weaker assessment of near-term growth prospects and a lower long-term projection for the unemployment rate. The Fed cut its estimates of unemployment for this year through 2017. It also trimmed the long-term (beyond 2017) unemployment rate to 5%-5.2%, down from December’s 5.2%-5.5%. However, stronger job market does not necessarily stoke inflation if wage pressure remains subdued. As Yellen noted, ‘we have not seen wage growth pick up…We may not see wage growth pick up’.