United States: Fed leaves rates unchanged in first meeting and signals it remains on course of further increases
February 1, 2017
At its first monetary policy meeting of the year, held on 31 January and 1 February, the Federal Reserve’s Open Market Committee (FOMC) decided to leave the target of the Federal Funds rate at a range of between 0.50% and 0.75%. The decision was in line with market expectations and followed the quarter-point hike at the previous meeting in December.
The Fed also made no change to its statement relative to the previous one in December, providing analysts and market participants no significant news on its economic outlook or when to expect its next rate hike. The U.S. Central Bank signaled only that it remains on course for further interest rate increases this year, as inflation returns towards the target and as the labor market continues to strengthen. Consistent with the statement, the markets’ reaction was muted. U.S. bonds recovered some earlier losses and equity markets ended in positive territory.
In the post-meeting statement, the Fed highlighted improvements in consumer and business sentiment and pointed out that it expects inflation to rise to its 2.0% target, as it makes further, yet gradual adjustments to the key monetary policy rate. Market participants, however, will wait for more information regarding future interest rates decisions in upcoming Fed speeches or when the FOMC releases the minutes of the meeting in the coming days, as Mikael Olai Milhoj, Senior Analyst at Danske Bank said:
“The Fed could have turned either more hawkish or dovish at the meeting but we have to wait for upcoming Fed speeches and/or the minutes to find out. It would not be the first time that the minutes would reveal big discussions after a 'boring' statement.”
Given that the Fed did not provide any guidance on when to expect the next rate increase, a hike during the March meeting seems unlikely—the current likelihood for a Fed hike in March is 38%—as the Central Bank has begun to prepare the markets for upcoming interest rate lifts.
Although the Fed is still awaiting more information regarding the policies of the new U.S. administration, Chair Janet Yellen has warned that fiscal policy and, hence, the U.S. economy, are facing an uncertain path under the Trump presidency. On 14 February, Janet Yellen testified before Congress and indicated that the FOMC will continue evaluating the U.S. economy’s progress in the upcoming meetings and signaled that if employment and inflation continue to evolve in line with their expectations, a further adjustment to the Federal Funds rate “would likely be appropriate”.
Although this could boost sentiment for a rate hike at the March meeting—since recent January data has shown inflation surged to a five-year high and the labor market strengthened further—the Fed’s Chair played down any expectations of a March rate rise and struck a note of caution regarding the uncertainty related to new administration’s plan to cut taxes and increase infrastructure spending. This would lead to looser fiscal policy and more rapid economic growth.
Author: Ricardo Aceves, Senior Economist