Fed's Nod to Global Risks Lowers Chance of March Rate Increase

Will Markets Play a Bigger Role at Fed's March Meeting?
  • Fed shifts into wait-and-see mode following market turmoil
  • Fed `closely monitoring' global economic developments

Federal Reserve Chair Janet Yellen and her colleagues have opened the door to a change in their outlook for the economy this year, and possibly a slower pace of interest-rate hikes that would make a move in March less likely.

QuickTake The Fed Lifts Off

”The Fed is really in a wait-and-see mode,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “They want to see if everything in the global economy and financial markets is really going to bleed through and affect inflation and their outlook for the economy.”

The meeting was a tricky communications challenge for the Federal Open Market Committee. U.S. central bankers had to acknowledge dimming expectations of global growth that have resulted in a sharp stock market sell-off while avoiding a definitive directional hint on the timing of the next rate increase. After all, it is only six weeks since they raised rates for the first time in almost a decade.

The FOMC said Wednesday it is “closely monitoring global economic and financial developments” while “assessing their implications for the labor market and inflation, and for the balance of risks to the outlook” in their statement after a two-day meeting in Washington.

That was a soft back-pedal from December when they said risks were “balanced,” and some economists said it makes an interest-rate hike at the next FOMC meeting in March less likely, while not precluding it. The FOMC left the target for their benchmark rate unchanged at 0.25 percent to 0.5 percent.

“It reduced the likelihood of March because it revealed there is more uncertainty among committee members,” said Laura Rosner, U.S. economist at BNP Paribas in New York. “It is about respecting the data and the outlook, and there is disagreement about that right now. And the statement is a reflection of that” as it doesn’t commit just yet, she said.

Just last month, U.S. central bankers penciled in above-trend growth of 2.4 percent for 2016, according the median estimate, with the benchmark lending rate rising an additional percentage point to 1.4 percent by the end of the year.

Mixed Data

Since then, economic reports and financial markets have shown a mix of data that, to be fair to the committee, points to risks but not conclusions about the forecast. Households look to be in good shape by some measures.

U.S. non-farm payrolls are up 229,000 jobs a month on average over the past six months. Gas pump prices are down another 18 cents for a gallon of unleaded since Fed officials met last month, according to the national average calculated by the American Automobile Association.

While household portfolios have been pounded by the 6.5 percent decline in the Standard & Poor’s 500 Index this year, home prices increased 5.8 percent in November from a year earlier, according to the S&P/Case-Shiller index of property values in 20 cities.

The decision to leave rates unchanged had been expected. Even so, financial markets gyrated on the announcement, with the Standard & Poor’s 500 Index closing down 1.1 percent.

“The equity market rallied 5 percent in anticipation of exactly what we got today,” said Phil Orlando, the New York-based chief equity-market strategist for Federated Investors Inc. “So the selloff today is, very simply, buy the rumor, sell the news.”

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