Yellen: We Can Raise Rates; We Just Won’t Do It…

March 18, 2015 1 Comment

This month’s quarter of the FOMC press conference was pretty much as expected. Janet Yellen’s statements came off as more dovish than anticipated. Here are the main points to consider from the Press Conference this afternoon:

More Changes in Interest Rate Benchmarks

Median projections for the fed funds rate fell from 0.630% to 0.625% at the end of 2016. There was also a 50bps projection drop to 3.125% at the end of 2017. However, median run projections seemed to have been unchanged at 3.75%.

More Changes In Economic Benchmarks

The FOMC claims that the unemployment rate can be lowered without fostering unwanted inflation, which confirms my thesis regarding the labor market being nowhere near full employment. The-Non Accelerating Inflation Rate of Unemployment (or NAIRU) threshold has been lowered between an area from 5.2 – 5.5% to 5.0 – 5.2%. Real GDP growth projections declined from 2.8% to 2.5% in 2015 and 2016, while falling to 2.2% in 2017. Headline PCE inflation fell to 1.7% in 2016 while being unchanged in 1.9% in 2017.

Dropping The “Patient” Rhetoric

Everyone was wondering whether or not the FOMC would drop the ‘patient,’ and it actually did. But it was also careful to note that just because they are no longer patient, it doesn’t mean that they are ‘impatient (whatever that means).’ Which brings me to the next point.

Postponing Interest Rate Hikes

Projections provided by the FOMC suggest that we can expect interest rate hikes to start in September rather than June, as September appears to be a more likely and realistic data for the first hike in the fed funds rate. Then again, we’ve usually expected rate hikes from the FOMC before and it was very difficult to determine whether or not these incremental increases in rate would come to fruition. However, the FOMC noted that a hike at the upcoming April meeting was unlikely.

Although the future isn’t certain, the committee noted that once the economy has achieved further improvement in the labor market and inflation has increased to 2% in the medium term, we may start to see increases in the fed funds rate.

So the cost of borrowing much will remain where it is. This triggered a slew of panic buying.

Stocks are up, oil is up, gold is up, bond prices are up. The dollar, on the other hand, has seemed to have gone in the opposite direction. While the markets seem to be rallying on this news, we seem to be stuck playing the waiting game on the ‘recovery.’

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