Working at the usual blistering pace, WSJ's Fed mouthpiece Jon Hilsenrath cranked out 648 words in the space of just four minutes on the heels of today's FOMC announcement. "The Federal Reserve signaled it was moving toward interest rate increases in the months ahead now that signs of a dip in economic activity early in the year are waning," Hilsy notes, confirming that stocks are indeed still set for a rendezvous with 1937.
The Federal Reserve signaled it was moving toward interest rate increases in the months ahead now that signs of a dip in economic activity early in the year are waning, but the path of rate increases could be less steep than officials anticipated before.
For now, the Fed said, a benchmark interest rate near zero “remains appropriate.”
But in forecasts the Fed made public about its interest-rate outlook, 15 of 17 officials said they expected to start raising short-term interest rates before the end of 2015. The projections suggest officials are gravitating toward one or two quarter percentage point interest rate increases by December. That would move the Fed’s benchmark interest rate up from near zero, where it has been since December 2008.
The last time the Fed made such projections, its consensus appeared to be building around two rate increases this year. Fed officials also nudged down their rate projections for 2016 and 2017 by a quarter percentage point. The shifts suggested officials have become less certain about the longer-run vigor of the U.S. economy and its capacity to withstand much higher rates. Expansion of output is on track again in 2015 to undershoot the Fed’s expectations.
The meeting has gotten a great deal of attention because Fed officials had declared in March that it would be a live meeting when an interest rate increase was possible if the economy had performed up to expectations. Early in the year many Fed officials thought a rate increase in June was a likely scenario. Then the winter slowdown derailed that plan and many investors are now looking toward a first rate increase in September.
In a policy statement accompanying its newest economic and interest rate projections, the Fed pointed with some relief toward an improving economic backdrop after output contracted in the first quarter. Economic activity had been “expanding moderately,” the Fed said, after a winter stall, and job gains had “picked up.” The Fed pointed to a “moderate” pickup in consumer spending and some improvement in housing.
While inflation continued to run below its 2% objective, the Fed noted energy prices had stabilized after driving inflation lower.
The Fed has been saying since March it would begin raising rates when it sees further improvement in the labor market and becomes more confident inflation will move toward its 2% objective.
The central bank’s projections suggest a September move remains possible, but disagreement is brewing among officials about how soon and how aggressively to act later in the year.
For the fourth straight meeting, Fed Chairwoman Janet Yellen won uniform agreement on the rate decision with no dissents.
The interest rate projections showed that two officials don’t want to move rates at all this year. Five officials, on the other hand, want to move rates up by a quarter percentage point and another five want to move it up by half percentage point. In March, only one official saw a quarter percentage point increase and seven saw a half percentage point rise. The shifts show the center of gravity on the number of rate increases this year is moving down.
The median estimate for rates in 2016 has shifted down to 1.625% from 1.875% in March. The median estimate for 2017 has shifted down to 2.875% from 3.125% in March.
In economic projections accompanying the Fed’s statement, the central bank revised down its estimate of growth for 2015. In March the Fed saw economic output expanding by 2.3% to 2.7% this year. In the latest estimate it revised output growth to 1.8% to 2.0%. The Fed has consistently for several years found itself revising down growth estimates after early-year stumbles. However the central bank stuck to projections for the coming years.
The Fed nudged up its unemployment forecast for 2015, but kept its inflation forecast largely in line with previous estimates.
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So thank you vanishing workers and double-adjusted GDP prints, we're now all set for a rate hike-induced recessionary talespin to be followed by QE4 which, as BofA recently noted, is "the biggest risk" of all for global equities.