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Fed Says Economy Expanding at a Solid Pace, But Continues to Say It Will be Patient


Fed Says Economy Expanding at a Solid Pace, But Continues to Say It Will be Patient

The first scheduled FOMC meeting of 2015 ended today, and the Fed sounded a little more optimistic about the strengthening economy. That should increase the chance of a Fed rate hike in 2015. The primary indication that the Fed is seeing significant economic improvements is the change in the first sentence of the policy statement. The first sentence changed from the following in the December statement:

Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace.

To the following in today’s policy statement:

Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace.

The phrase "moderate pace" has been changed to "solid pace", and that’s a clear indication of that the Fed is acknowledging the strengthening economy.

The Fed also removed the words "for a considerable time" in describing a pledge to keep rates near zero. That suggests the Fed will be moving forward this year to start increasing rates. However, it’s in no way a sure thing. The Fed still says that it’ll be "patient", and it continues to stress that a rate hike will depend on economic data:

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

The Fed suggested that low inflation and a weak global economy could cause it to delay rate hikes. However, it’s still quite possible that the first Fed rate hike will be announced at the June meeting. If the economy cooperates and the Fed moves in that direction, we should see signs in the Fed’s March and April meetings. If we see the removal of words like "patient", the Fed is definitely moving toward a rate hike.

One thing that may increase the chance of a rate hike delay is this year’s composition of the FOMC. Two outspoken inflation hawks, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, are not voting members this year. This is due to the yearly rotation of the regional Fed presidents who make up voting members on the committee. Out of the four new voting members, only one is considered an inflation hawk. That’s Richmond Fed President Jeffrey Lacker. He might not be as much of an inflation hawk as Plosser and Fisher. Both Plosser and Fisher voted against the Fed’s policy statement. This time neither Lacker nor anyone else on the FOMC voted against the policy statement.

Future FOMC Meetings

The next two FOMC meetings are scheduled for March 17-18 and April 28-29. The March meeting will include the summary of economic projections and a press conference by Chairwoman Yellen.

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Anonymous   |     |   Comment #1
Any rate increases will be small, gradual and for the most part symbolic. The main reason being supply and demand. As global economies struggle, demand for U.S. debt will continue to be strong,  with little need to increase rates. Treasury yields keep dropping. 
Anonymous   |     |   Comment #2
"Stated differently, the Fed’s ZIRP policy is a giant subsidy to speculators. Owing to the utter foolishness of its “transparent” communications policy, embodied in such gems as the fact the term “patient” is now the well understood code word for no rate increases for the next two meetings, traders don’t even have to worry about one single dime of unexpected change in their carry cost, or the losses that can result from needing to suddenly dump less than fully liquid assets in order to repay their overnight borrowings (or liquidate options and other similar “structured finance” positions)."
bill   |     |   Comment #4
**** traders
henry   |     |   Comment #3
cash has lost about 10% to inflation last 5 years. terrible. cash is much less "safe" than lots of people realize
Anonymous   |     |   Comment #5
Approx 2% per year?  I continue to use Bank of Mattress if only that cost!
Anonymous   |     |   Comment #11
2%. I wish it was that low.  I estimate that inflation is at 10 - 12%
Anonymous   |     |   Comment #16
Inflation, measured by the bureau of labor and statistics, has been at 2 percent a year, for 6 years, since the bailout in 2009. This statistic was stripped of its consumer components, a decade ago, when Alan Greenspan began lowering rates, and inflation began to rise. The number no longer relates to inflation pressures on the average american, but allows the fed to continue their low rate policies.  Keep record of price increases as a percentage, it runs about 5 to 6 percent a year, which is the same yearly percentage increase, the president asks for the federal minimum wage. ($7.25 to $10.02 over 6 years = 5.9 percent)
Anonymous   |     |   Comment #6
There is so much liquidity in the system that I don't think there will be any increase in interest rates paid on deposits, for a long time.  Ben Bernanke and his successor have pretty much ruined it for those of us who were hoping to retire on the interest earned on accumulated savings from years of hard work and prudence.
henry   |     |   Comment #7
suggest a conservative balanced portfolio, something like 30% stock/70% bond. academically, this has proven to be much better and it helps protect against long periods of 0% interest rates like we are currently in
Anonymous   |     |   Comment #8
Can't tell him to get into stocks now if he isn't already in, market is up for 6 years.... wait for a big drop then get in.
henry   |     |   Comment #9
yeah....maybe. time IN the market is better than TIMING the market.
Anonymous   |     |   Comment #10
Do you know why most of these people like to invest in CDs? They wouldn't be able to handle the ride if things went wrong from this level and they would probably sell out at a loss.
Anonymous   |     |   Comment #13
I'm not arguing with you, I have always had some money in the market but I am semi-retired now and have been for 11 years so I have much less in now than I had when I was working. I can't stand what the federal reserve does, they create the mess with their constant manipulations over the years and then they come to the rescue.... comical at best. When I was working all the time I never had time to see what was going on and I didn't care but now that I have time I see everything...wish I didn't.
Anonymous   |     |   Comment #14
I don't think it was Bernanke that did this to us I think it was Greenspan and years of trying to save the stock market from every little bump in the road instead of letting free markets work.... him and congress created this mess over time along with a few of the presidents with their constant tax cuts.  Bernanke had to step in and put floor in before their were runs on the banks but he has gone way too far imo and now they have so much in they can't back out... really sad and people just say nothing.. oh well nothing we can do and that is the problem.
Anonymous   |     |   Comment #19
I agree, it all started with Greenspan.  Bernanke only followed and made the situation worse.

However, I disagree last part of your statement.

There is NOTHING WE CAN DO!  We are not influential enough to make a difference or even count for that matter.  Corporate America runs the government.
Anonymous   |     |   Comment #20
The FED is not the real problem. The ever-increasing intrusion of government (federal, state and local) into the economic and social lives of its citizens is the main culprit. Stifle growth, increase taxation, redistribute and this is what you get. A stagnant economy coupled to a fragmented society. The FED is problematic but I dare say things would be much worse without them.
Anonymous   |     |   Comment #21
That is what I said maybe you didn't understand because of what I said before it....."oh well there is nothing we can do and that is the problem"  that is what I believe, I didn't agree with what Greenspan did but there was nothing I could do and in the end I got hurt with everyone else.... nothing we can do.
Anonymous   |     |   Comment #15
Fed Statement: Not Dovish, Not Hawkish—-Just Gibberish

“The FOMC is not really comprised of economists or central bankers. It is simply a groupthink posse of spineless cowards who are petrified of a Wall Street hissy fit—–and are therefore willing to dispense whatever spurious word clouds they judge may be necessary to keep the gamblers hitting the “bid” until the next meeting.”

Anonymous   |     |   Comment #17
Translation: savers, you are so ****ed!
paoli2   |     |   Comment #18
#17  Say what you mean and mean what you say.  Don't let some lil censorship button tell you what to think.  BTW, if you are not a saver too, why are you on here daily?  Misery loves company??
Jeff   |     |   Comment #22
I am a saver who has diversified in recent years, now only about 20% in CD,s bk. accts., etc.  But I still read this forum since I am interested and Ken does a great job.  I started buying residential real estate a few years ago, now it's 80% of my portfolio.  If you buy it right, and not at the "top" of the market, you will do much better than CDs.  People have to live somewhere, at least it is true in desirable residential areas.  I rent some properties, some I rent briefly then sell.  I am not an "expert" at this, but consistently make 5% to 8% annual return after all expenses.  In my opinion, the real risk was in getting 2% on CDs.