The Federal Reserve decided not to hike the Fed funds target rate at the March FOMC meeting today- as widely expected.
The headline from this week’s meeting is the big cut in the FOMC “dot-plot” interest rate path through 2018.
In one fell swoop, the FOMC cut the median year-end Fed fund rate by 50 bps to just 0.88 percent- in-line with my forecasts. There was a parallel downward shift in the year-end 2017 rate expectations to 1.88%, and by year-end 2018 median rate expectations fell by 38 basis points to 3.0%. The median long-run Fed funds rate forecast fell by 25 basis points to 3.25% from 3.5%.
There was very little change to the Fed’s U.S. economic or inflation outlook since December. The Real GDP outlook for 2016 fell by two-tenths of a percent since December’s forecast to 2.2% (This is my forecast as well), and the outlook for 2017 was trimmed by a tenth of a percentage point to 2.1%.
The core PCE inflation outlook is nearly the same as forecast in December, while headline PCE inflation is forecast to be somewhat lower this year (only 1.2%), down 0.4 percentage points from the December forecast- largely on lower energy and import prices.
So, the downward adjustment in the rate path was probably a reflection of the low global interest rate environment and the downside risks from global economic and financial developments more broadly. It also reduces the dissonance between market rate hike expectations and the FOMC’s own internal view that was probably unsustainable.
In short, this is a dovish pivot for the FOMC that should be welcomed by financial markets. However, it could call into question the FOMC’s commitment to data dependence, since U.S. economic data have largely come in as the FOMC expected back in December- yet additional rate hikes have not been forthcoming. This could reinforce the market’s belief that a dovish Fed is not all that interested in walking the talk, and when the June FOMC meeting comes around skepticism could still reign.
Esther L. George voted against this decision, preferring to raise the Fed funds target range by 25 basis points today.