United States Monetary Policy March 2016

United States

Fed leaves interest rates unchanged and adopts a more dovish stance

The U.S. Federal Reserve (Fed) decided to leave its main monetary policy rate unchanged with the range of 0.25% and 0.50% at its 15–16 March meeting. The decision was widely expected and followed a similar move in January, when the Fed also decided to leave interest rates unchanged. The Fed hiked rates by 25 basis points in December last year, which was the first increase in nine years.

In its statement, together with remarks by Chair Janet Yellen, the Fed struck a dovish tone in reducing the number of increases that it expects to carry out this year from four to two. This reflects a clear shift in U.S. monetary authorities’ thinking, as they gave more consideration to the worsening in the global economic outlook and the impact that it could have on the U.S. economy. In fact, rising uncertainty regarding the global outlook prompted U.S. monetary authorities to trim their forecasts for economic growth for this year from December’s 2.4% to 2.2%. For 2017, the Fed now expects the U.S. economy to grow 2.1%, which was revised slightly down from its previous 2.2% forecast.

As in January, the Federal Open Market Committee (FOMC) acknowledged the significant improvement that the labor market is experiencing at a time when inflation is also running below its 2.0% target. The Fed recognized that inflation is still low, mainly due to weak energy prices and cheaper non-energy imports. Meanwhile, a slowdown in China continues to cast a shadow on the global economy, the strengthening of the U.S. dollar has curtailed growth in exports, and business investment, particularly in the energy sector, remains subdued due to the current environment of low commodities prices.

The FOMC confirmed its view of past months yet again in saying that, “in light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal,” and added that, “the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

More recently, in speech to the Economic Club of New York, Fed Chair Janet Yellen reiterated her dovish tone in stating that the Fed appears unlikely to raise interest rates in the coming months and that it would proceed cautiously due to rising concerns that the U.S. economy remains exposed to the global slowdown and potential fallout from a drastic deceleration in the Chinese economy. During the 29 March speech, Yellen highlighted the subdued global economic environment coupled with the FOMC’s “asymmetric” capacity to respond to economic shocks as the main reasons for the Committee’s lower path for the funds rate in March.

Growing expectations that the Fed will remain on hold for the next months provided a boost to U.S. asset prices, while prompting the dollar to remain stable. Moreover, the Consensus view among the majority of analysts is that U.S. monetary authorities’ decision and more dovish tone pushed out rate hike forecasts. Lewis Alexander, Chief U.S. Economist at Nomura, stated:

“There was nothing in the speech to suggest that the Committee is closer to another rate hike than it was at its March FOMC meeting. Yellen’s speech appeared to push back on recent hawkish comments by regional Fed Presidents such as Williams (San Francisco Fed), Harker (Philadelphia Fed), Lockhart (Atlanta Fed), and Bullard (St. Louis Fed). Yellen’s remarks today reinforce our call that an April rate hike is very unlikely and the next rate hike is likely to come at the June FOMC meeting.”

FocusEconomics Consensus Forecast panelists expect the pace of rate hikes in the coming years to be very gradual. The panel sees the Federal Funds Rate averaging 1.20% at the end of 2016 and projects that it will increase to 2.15% by the end of 2017.

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United States Monetary Policy Chart

USA Monetary Policy March 2016

Note: Total assets on the balance sheet of the Federal Reserve in USD billion and Federal Funds Target Rate in %. Current rate set at a range of between 0.25% and 0.50%.
Source: Federal Reserve

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