March 2015 FOMC Meeting
Economics in a nutshell: “Let’s hope the slowdown in spending is simply a result of the horrible winter.”
RATE DECISION: Fed funds rate maintained at a range between 0% and 0.25%
IN A NUTSHELL: "… an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting."
The long awaited FOMC meeting ended and the Fed members made it clear a rate hike is coming by removing the word “patient” from the statement. Indeed, in her comments after the meeting, Chair Yellen specifically stated that she could not rule out an increase in June. All we know is that April has been taken off the table. To me, June remains a possible starting point, but the key is likely to be some hint that wage gains are finally here. With Wal-Mart and other firms and states raising minimum wages, it is only a matter of time before that increase appears in the data, though how long is unclear. While any lag in recognizing those increases could push back the first rate hike, it is now only a matter of when, not if.
In its review of the economy, the Committee faced up to the reality that the recent data have been a little softer than the numbers that came out before the last meeting. So the members categorized growth as having "moderated somewhat". Is the Fed downgrading growth? Not really. There was a bad winter and growth ease somewhat, so they said so. That's all. The statement reaffirmed the strong nature of the labor market and repeated the views of "advancing" investment, moderate consumer spending and a sluggish housing market. In other words, little changed.
As for inflation, it remains well below the desired level and the Committee even downgraded its forecast for this year. But that too was not a shock. At the last meeting, the statement noted that "inflation is anticipated to decline further in the near term". It did and once again, all the members did was reflect reality. But the Fed will not move until it is "reasonably confident that inflation will move back to its 2 percent objective over the medium term". Too low inflation is a deal breaker when it comes to pushing rates back up to normal levels.
So, when will the first rate increase occur? I have thought it would be June and I am not yet prepared to change just yet. While the economic and inflation outlooks were revised downward, that is probably a function of the transitory winter weakness rather than a belief that the underlying trend has decelerated. Those that argue that the Fed is now more concerned about the economy and is putting off the first move, may be missing that point. The Fed is becoming even more data driven and if the data are as good as I expect they will be, the conditions could be in place for a hike as early as the June 16-17 meeting.
(The next FOMC meeting is April 28-29, 2015.)
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