For the past couple of weeks, investors, number-crunchers, and financial pundits had been talking about one word more than any other – “patient.” This was because of the possibility that the U.S. Federal Reserve, led by Chairwoman Janet L. Yellen, would drop the word from its low rate promise, thereby hinting at an interest rate hike as early as June. As it turned out, the central bank did remove “patient” from its official language, following this week’s Federal Open Market Committee meeting.
The Fed’s prepared statement following the meeting read as follows – “An increase in the target range for the federal funds rate remains likely as of April.” This means it still is highly unlikely that the central bank would raise benchmark rates before the summer, but without the word “patient” in its low rate promise, there is also a good chance that the Fed may increase rates by the summer.
The FOMC also reiterated that job prospects in the United States have greatly improved as of late; employment statistics are among the most important variables the Fed has considered when debating on when to raise interest rates.
However, the Fed did stress that certain improvements need to be made before any sort of interest rate increase can take place. “The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium-term,” read the Fed’s prepared statement in brief.
Going forward, experts believe that the Fed’s new guidance, which also includes revised thresholds for economic growth and inflation, may actually result in lower interest rates than expected. “The Fed offset the potentially hawkish signal this new guidance might send with much more dovish expectations about the future path of interest rates,” observed Christian Shultz of Berenberg. “The median FOMC member has lowered her end-2015 rate forecast from 1-1.25 per cent by half of a per cent to 0.5-0.75 per cent.”
He believes that with everything taken into account, it may take “a serious slowdown” in the U.S. economy to prevent the Fed from raising rates anytime in 2015, with July as the most likely month for an initial rate hike.
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