Posted on March 19, 2015 by the XM Investment Research Desk at 11:17 am GMT
The Federal Reserve gave a clear indication to markets on Wednesday that it is not a matter of “if” but “when” it would begin raising interest rates. The word “patient” was removed from the statement from the Federal Open Market Committee (FOMC) but this did not meant the US dollar reacted positively to this news. In fact the greenback plunged during the release of the statement as well as during Fed Chair Janet Yellen’s press conference due to the market’s repricing of interest rate normalization by the Fed.
Back in December’s statement, the Fed said it would be “patient” about raising rates. Now that it took out the word “patient”, it seems the Fed has reverted its guidance back to being data dependent, as indicated by Fed Chair Janet Yellen.
“Let me emphasize … that the timing of the initial increase in the target range will depend on the committee’s assessment of incoming information.”, Yellen said.
The Fed definitely sounded cautious about the outlook for the US economy. The Fed’s Summary of Economic Projections were downgraded for GDP growth, inflation and unemployment. Due to its views that the economy was growing only moderately, it lowered its expectations for the pace of rate hikes.
The Fed cut its estimate for the Fed funds rate by 50 basis points to 0.625% for the end of 2015, compared to 1.125% in December’s estimate.
Unless the Fed is more confident that inflation will move towards its 2% target rate it is unlikely that it will raise interest rates.
So the main take-away from the Fed statement was that while it was made more-or-less clear that there will not be a rate hike at the April FOMC meeting, a June rate hike is not automatic even though the word “patient” was dropped from the statement.
The downgrade of the assessment of the US economy has changed the trajectory that the central bank would follow and markets reacted negatively to the more dovish – than – expected Fed on Wednesday. The scaling back of rate hike expectations by the markets led to a sell-off in the dollar. There was a rally in the US equities markets since lower interest rates for longer would benefit US businesses.
The yield on the 10-year Treasury note fell to its lowest level in nearly three weeks, while the dollar weakened over 400 pips versus the euro. This helped the single currency bounce back to the 1.10 handle, although it has fallen back to pre-FOMC levels by Thursday to trade around 1.0630.