Fed Stands Pat and Lowers Expectations

Since before the rate hike in December, Fed Chairman Janet Yellen has repeatedly said that all interest rate hikes were going to be dependent upon the data. In other words, while the Fed was willing, and ready to raise interest rates, they were not going to just keep raising them to meet expectations.

The announcement today that the Fed will not be raising interest rates in March surprised no one. However, they also took the step of modifying their anticipated rate hike schedule, which originally anticipated four rate hikes this year, to a total interest rate of 1.25%. The new estimates now anticipate only two rate hikes during 2016. If that holds up, then the maximum Fed Funds Rate by year end would be just 0.75%.

While commodities and oil ran higher on the news, that is likely to be short lived. The whole, lower interest rates equals weaker currency thing only works when there is a stronger currency out there to run to, and right now, there just isn’t. The Dollar might not be particularly strong right now, but nothing else is any stronger, so those trends are likely to reverse themselves over the next month or two.

The stock market, reacted favorably. The idea is that the Fed isn’t going to snuff out the current economic expansion in defense against non-existent inflation. The vote, was 9-1 with only one member looking for a rate hike. The market is currently pricing in a June hike, but as we talked about yesterday, these are very small interest rate increases, and now, it looks like they will also be very slow. Time to come out of your financial bunkers and enjoy the rest of 2016.

What happens for 2017?

That depends a great deal on whether the deteriorating economic conditions around the globe signal the next worldwide recession, or if countries like China are just going to pop their own bubbles after riding sketchy political-economic decisions for too many years.

Leave a Comment