Fed on hold in March, but shaping for June

David Page, Senior Economist at AXA Investment Managers (AXA IM), discusses the Federal Open Market Committee’s (FOMC) meeting today and concludes that the projections of two rate hikes this year leave the Federal Reserve’s (Fed) outlook shaping for June in line with its “gradual normalisation” view.

The FOMC decision today left the Fed Funds Rate (FFR) unchanged at 0.25-0.50% as was widely expected. One member, Kansas’s George voted for a 25 basis points (bps) hike. The statement accompanying the decision referred to “moderate” expansion “despite global economic and financial developments”.

While household spending was still described as increasing moderately, business investment was described as “soft” (along with net exports), from “moderate in January”. The statement continued to assess “additional strengthening in the labour market”, but now recorded “inflation pick up in recent months”.

The statement also added that “global economic and financial developments continue to pose risks”.

March’s meeting included an update of participant forecasts and projections.

· Members’ projections for rates this year – the “dot plot” – showed a median projection lowered to just two hikes this year, down from four in December.

· GDP growth forecasts were lowered to 2.2% (year on year) for end 2016 from 2.4% in December (closer to our own 1.9%) and to 2.1% for 2017 (from 2.2%). 2018 was unchanged at 2.0%.

· Unemployment was expected to fall to 4.7% this year (from 4.7% in December), and then to 4.6% in 2017 (4.7%) and 4.5% in 2018 (4.7%). Longer run unemployment projection was also edged lower to 4.8% from 4.9%.

· Personal consumption expenditures (PCE) inflation was expected to lower in 2016 at 1.2% (1.6%), but forecasts were unchanged for 2017 and 2018 at 1.9% and 2.0% respectively.

Despite these changes to projections and forecasts Chair Yellen suggested there had not been a material change to the Fed’s outlook. Yellen said she was not convinced about the persistence of the recent pick-up in ‘core’ inflation.

She also said she thought weak wage growth most likely reflected additional labour market slack (not mentioning weaker productivity, composition effects or lower inflation expectations as possible explanations).

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