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Fed Dials Back Rate Forecasts, Citing Global Risks

Posted by Joseph Trevisani on Mar 16, 2016 6:19:02 PM

The Federal Reserve surprised no one by holding interest rates steady on Wednesday, even though just three months ago its members had envisioned the first of four 2016  hikes today.

Federal Open Market Committee members voted 9-1 to keep the Fed Funds rate  target at 0.25 percent to 0.5 percent, where it has been since December following the central bank's first rate increase in almost a decade.  

The policy statement from the FOMC specifically mentioned the risks from “global economic and financial developments" as did Chair Janet Yellen in her press conference following the decision.   

The FOMC members also issued their quarterly  economic and policy projections which posited an 0.875 percent Fed Funds rate at year end, implying two more 25 basis point hikes this year, half of what the board assumed in December. 

The yields on Treasuries fell sharply. The 10-year lost 6 basis points to 1.9081 percent and the 2-year shed 11 points to 0.8550 percent, its weakest close since March 3rd. Equities rose, the Dow gained 74 points to 17325 and the dollar fell against the euro and the yen.

Global economic growth has weakened since the December FOMC meeting. The International Monetary Fund, among others, has reduced its estimates for world economic activity this year.  This and the evident impact of the stronger dollar on U.S. manufacturing has disturbed the assumption that the U.S. would be largely unaffected by world conditions.

The turmoil unleashed by China’s yuan devaluations and the damage to many emerging markets and resource economies caused by the collapse in commodity prices have also raised doubts about the U.S. ability to ride out the downturn.

Ms Yellen has said that  equity and commodity market turbulence had “significantly” tightened financial conditions.

But what was left unsaid was the role that the Fed's own policy, its December hike and projections, had in upsetting markets accustomed to a decade of accommodative money from the world’s primary central bank. 

It is not only the American economy that is now beholden to the world, but Fed policy itself.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

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