The third regularly scheduled FOMC meeting of 2011 ended this afternoon, and for first time, the Federal Reserve held a news conference with Bernanke answering questions from reporters. There remains no signs of future rate hikes. Both in the FOMC statement and in Bernanke's responses to the reporters, there is little concern about the current inflation being a long term issue. According to the FOMC statement:
Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory
The first step on the road to higher rates will be when the Fed ends the purchasing of the Treasury securities (QE2) at the end of June. The Fed continues to stick to that plan, and that appears to be appeasing the inflation hawks on the Committee since all voted in favor of today's monetary action. If there's a move toward QE3, we may see some dissenting votes. However, the inflation hawks are in the minority.
The next step on the road to higher rates will be for the Fed to stop the reinvesting principal payments from its securities holdings. Bernanke mentioned in the news conference that he considered such a move to be the start of the tightening process. There was no clues about when this would occur. The third step will be the changing of the "extended period" language for holding the Fed funds rate at exceptionally low levels. A reporter did ask Bernanke about how he would define an extended period, and Bernanke said that it would take "a couple of meetings" before any interest rate action is taken.
Bernanke mentioned several times in the news conference that both the unemployment and inflation are driving their decisions. As long as the unemployment rate remains high and core inflation remains stable, we probably won't see any moves toward rate hikes.
The Fed also released its economic projections (pdf) which forecasts GDP, inflation and unemployment through 2013. Compared to their January forecasts, inflation rates went up slightly and unemployment rates went down slightly. These are moving in the right direction for a better economy and for rate hikes. However, the GDP projections went down a little. Even with these forecast changes, the unemployment rate is still projected to be at least 6.8% in the fourth quarter of 2013, and the inflation rate is expected to be no higher than 2.0%. So unless the economy improves a lot faster or unless core inflation becomes a lot worse, it could still be a long time before we see much tightening at the Fed.
Future FOMC Meetings
If you want an idea about what the market thinks regarding when the Fed will start hiking rates, check out this CME Group FedWatch tool. It shows the probability of rate hikes in the future FOMC meetings based on the 30-Day Fed Funds futures prices. The probability of a higher Fed funds rate by December is 25.9%. That's down from 28.7% after the last meeting. It looks like we'll have to wait to 2012 at the earliest for a rate hike. According to the futures market, the chance of a rate hike by next March is 55.0%. That's down from 61.2% after the last meeting. And the chance of a rate hike by next April is 72.8%.
The next two FOMC meetings are scheduled for June 21-22 and August 9.