The Federal Reserve’s Open Market Committee just concluded their March policy meeting and it certainly gave traders plenty to chew over heading into Q2. As we noted in our FOMC preview, traders were hyper-focused on whether the central bank would remove its “patient” pledge (before raising interest rates) and on that front, the Fed did not disappoint. As most analysts expected, Yellen and company removed the 'patient' terminology; to use a gardening analogy, it looks like the economy’s proverbial “green shoots” have finally morphed into impatiens.
While the central bank removed its explicit patient pledge, other aspects of the Fed’s statement, including the Summary of Economic Projections, implied that the central bank could still be “patient” with rate hikes. The committee essentially ruled out an interest rate increase at its next meeting, stating that, “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting." More to the point, the median estimate for end-2015 interest rates (the so-called “dot chart”) was revised down from 1.125% in December to just 0.625% Wednesday; the end-2016 forecast was also revised down to 1.875% from above 2.5%.
Supporting this view, the central bank revised lower its forecasts for GDP, unemployment and core PCE inflation for each year out to 2017. Interestingly, the central bank revised down its long-term forecast of the Non-Accelerating-Inflation Rate of Unemployment (NAIRU, or just the unemployment rate associated with “full employment”) to 5.0-5.2%, meaning there is less urgency to raise rates with unemployment still well above that level.
The other major development we highlighted in our preview was the potential for the Fed to mention the deleterious impact of the strong dollar on corporate profits and the economy as a whole. On that front, the central bank was mostly mum, just reiterating that it would take “international developments” into account.
Market Reaction
As my colleague Neal Gilbert noted on twitter, almost everything beyond the U.S. dollar was trading higher in the wake of the Fed’s statement. EUR/USD rallied about 150 pips back through 1.07 to test the 1.08 level, GBP/USD recovered back into its previous-support-turned-resistance zone between 1.48 and 1.49 and USD/JPY dropped from its 7.5-year high at 121.80 back toward bullish trend-line support around 120.00. Meanwhile, US equities rocketed higher, with the DJIA and S&P 500 now trading up nearly 1% on the day, while the U.S. 10-Year yield dropped back below 2.0% to 1.98% in the immediate aftermath of the statement’s release. WTI climbed toward 45.00 and gold bounced back above 1160.
As we go to press, Fed Chair Janet Yellen is taking the stage for her press conference, so more volatility is likely as reporters try to pin down the likelihood of a June rate hike – for now, I remain skeptical, but the Fed will be data-dependent as ever.
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