Nine minutes after the release of the new 'most important' data of the year, The Wall Street Journal's Jon Hilsenrath [7] has unleashed a briefer than normal 530 word summary of what "common knowledge" we should understand from Janet Yellen's latest statement. While the Fed is a little less optimistic about the outlook for economic growth in the short-term, Federal Reserve officials nudged up their projections for short-term interest rates in 2015 and 2016 in a modestly hawkish manner. Taken together, the Fed's new interest rate forecasts imply slightly more aggressive credit tightening plans taking shape in the next two years than previously thought.
Via The Wall Street Journal, [7]
Federal Reserve officials nudged up their projections for short-term interest rates in 2015 and 2016 but slightly reduced their outlook for interest rates in the longer-run.
The shifts emerged from the Fed's latest two-day policy meeting. In a statement released after the meeting, the Fed underlined an improving economic performance in the last few weeks and said it would wind down the monthly pace of mortgage and Treasury bond purchases by another $10 billion starting in July, to $35 billion.
Economic activity rebounded since officials last met in April, the Fed said in its official policy statement.
"Labor market indicators generally showed further improvement," the Fed said on an optimistic note. "The unemployment rate, though lower, remains elevated." Officials also pointed to a recent resumption of business investment after a slowdown earlier this year as one source of an improved economic environment.
That tint of optimism follows a dismal first quarter in which the economy contracted, forcing officials to reduce their projection for economic growth this year. Officials now see the economy expanding at a 2.2% rate in 2014, substantially slower than a projected growth rate of near 3% offered last March. Still, the Fed maintained its optimism about a pickup in 2015 and 2016.
Its interest rate forecasts are likely to draw substantial attention among investors.
On average, Fed officials projected the benchmark federal funds rate would hit 1.2% by the end of 2015 and 2.5% by the end of 2016, up from averages of 1.125% in 2015 and 2.4% in 2016 when the Fed last projected rates in March. Over the longer run, officials on average said the target interest rate could settle in at a lower-than-normal 3.75%, down from earlier forecasts of 4%.
Taken together, the Fed's new interest rate forecasts imply slightly more aggressive credit tightening plans taking shape in the next two years than previously thought, but less aggressive beyond 2016. Still, the shift in forecasts can be skewed by changes in the composition of the Fed's policy making committee since the last forecast round in March. Two officials have left and three new officials have joined.
The Fed's new interest rate forecasts arise against a shifting economic backdrop. Officials in their projections for the years ahead see the jobless rate falling more than previously thought.
They see the jobless rate receding to 6% or 6.1% by year end and then to the mid-5% range in 2015 and low-5% range in 2016. Those represented downward revisions from March and suggest the Fed sees less slack in the economy than previously thought, which could help explain the slightly higher near-run interest rate projections.
At the same time, however, the Fed is a little less optimistic about the outlook for economic growth. Officials said the economy's growth potential might be as low as 2.1% in the long-run, the latest in a string of downward revisions made in recent years. That gloomier long-run growth outlook could help explain why the central bank is producing a lower long-run interest rate forecast of 3.75%.
No officials dissented at the meeting. It was the third straight policy meeting this year for Fed Chairwoman Janet Yellen in which there was no dissent.
