Global investors are still digesting the significance of yesterday’s March Federal Reserve meeting that led to massive swings with U.S. equities, U.S. Treasuries, and the U.S. dollar which came after the Federal Reserve removed “patient” from their policy statement about raising interest rates and yet still managed to telegraph a dovish tone by indicating that a rate hike at their next policy meeting in April “remains unlikely” as market expectations now shift to a interest rate hike in late 2015 or 2016.
The dollar weakened as the euro climbed 3 percent, the Dow rallied over 200 points, and the 10 year Treasury dropped over 12 basis points (-6.21 percent) to 1.92, marking the largest decline since October 14′, and even more closer to its 52 week low of 1.64 percent.
The drop in the yield with the 10 year Treasury is good news for U.S. homeowners and car buyers looking to secure low interest rates in the spring while the decline in the dollar is good news for U.S. export prices and commodities.
Fed Chair Janet Yellen sounded dovish at the press conference when she explained that “just because we removed the word ‘patient’ from the statement doesn’t mean that we are going to be impatient.”
The Fed has not raised interest rates since 2006 and took highly accommodative actions during the recession in December 2008 to lower the federal funds rate to just above zero percent where they still remain today.
Yellen admitted yesterday that “the timing of the rate increase will depend on the Fed’s assessment of incoming economic data.”
Yellen was ambiguous about spelling out an exact timetable for raising rates and suggested that an interest rate hike could occur “at any later meeting, depending on how the economy evolves.”
Yellen said that U.S. GDP growth appears to have slowed in the first quarter of 2015 and cited a moderation in household spending, a subdued recovery in the housing sector, and weakened export growth.
The Fed’s expectations for GDP growth in 2015 are at a “moderate pace” with robust job gains and lower energy prices supporting household spending.
The Fed lowered its forecast for 2015 GDP growth to 2.3- 2.7 percent from 2.6- 3.0 percent that was projected earlier in December.
Meanwhile, 2016 GDP growth estimates were slightly lowered to 2.3 to 2.7 percent from 2.5 to 3.0 percent that was projected earlier in December.
As for inflation, the Fed’s preferred measurement for inflation remains with personal consumption expenditures (PCE) and core personal consumption expenditures (Core PCE), according to the Fed’s mandate.
Looking at the Fed’s forecast for inflation through the lens of PCE and Core PCE, it is clear that the Fed has established a later timeline for when inflation will reach the Fed’s 2 percent inflation target.
Last December, the Fed projected that inflation would reach 2 percent in 2016, according to their central tendency projection.
But yesterday the Fed provided an updated projection for inflation which shows that inflation will grow more gradually during the next couple of years and not reach its 2 percent inflation goal until 2017.
The Fed expects the unemployment rate to drop more rapidly in 2015 compared to their earlier December projection.
The unemployment rate is expected to reach 5.0 to 5.2 percent in 2015, lower than December’s projection of 5.2 to 5.3 percent.
The median reading on the Fed’s quarterly “dot plot” which measures Fed members’ expectation for raising interest rates with the federal funds also dropped on the plot chart, suggesting a later rate hike.