The Fed turns dovish

By Ken Taubes, Chief Investment Officer US

The Federal Open Market Committee (FOMC) took a dovish turn on 17 March, indicating uncertainty about the course of the economy and future interest rate hikes.

Chair Janet Yellen indicated a continued bias towards rate hikes in 2016, but made no commitment on the timing.

Chair Yellen maintained her stance that Fed policy will be data dependent, but appeared to lack confidence in the Fed’s forecast for the economy.

The dovish direction of the FOMC and its uncertain posture on the economy comes on the heels of easing measures by the Bank of Japan (BOJ), the European Central Bank (ECB), and other central banks around the world, opening the door, once again, for investors to pursue risk assets.

The Fed’s forecast on inflation also appears uncertain. In discussing the outlook for inflation, Chair Yellen said the Fed “has not yet concluded that we have seen any significant uptick that will be lasting in, for example, core inflation.”

Yet, inflation has been rising. Core PCE inflation, the preferred gauge of the Federal Reserve, rose from the revised 1.46% in December to 1.67% in January, the highest level since February 2013. At 2.3%, core CPI already stands above the FOMC’s 2% inflation target.

CPI services inflation, excluding energy, reached 3.1% as of February 29. Both Core CPI and CPI services inflation have been driven by the upward trends in both housing and medical care.

Economic conditions are generally supportive of the Fed’s new forecast of two rate increases. But based on today’s statement, we no longer believe the Fed will increase rates in April. Of course, if the data remains positive, we still may see a rate hike before the end of the second quarter.

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