2015 ended with an interest rate increase and an expectation that the United States Federal Reserve would continue to hike the Fed Funds target rate during 2016.
However, here we are early in February and the FOMC is already backtracking on plans to increase interest rates. The dot plot looks well and truly thrown out of Janet Yellen’s window.
The Federal Reserve backed itself into a corner back in 2015 as good jobs numbers and an insistence that the low inflation rate was due to short-term transitory issues.
However, yesterday, Ms Yellen presented a very different picture from that of only two months ago during her testimony to the Senate Banking Committee, in Washington DC.
In comments released prior to the testimony, the FOMC issued a Monetary Policy report which was very dovish on the prospect of interest hikes during 2016.
Furthermore, during her testimony, Yellen said that domestic financial conditions had become “less supportive” of economic expansion.
Chair Yellen went on to say:
“Against this backdrop, the Federal Reserve Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labour market indicators will continue to strengthen.”
The latest market guidance that was given by the Federal Reserve comes at a time when US growth numbers are looking patchy. Ms Yellen also gave a nod to external factors that could influence the trajectory of US interest rate policy as she took a swipe at what she saw as China’s “unclear” currency policy and its effects on global equity markets.
Yellen portrayed a more pragmatic approach on future interest rate trajectory. Not only did the Federal Reserve Chair admit that future interest rate increases would be delayed, but if necessary, the FOMC had contingencies that meant the next move on interest rates could be a cut.
The pragmatism and ability to change a plan can be seen as a source of strength. However, it is also rather worrying that such capable persons that make up the US Federal Reserve could now be thinking that they may have errored on the most important call that they had to make since the great recession of 2008.