The second FOMC meeting of the year ended this afternoon, and the Fed opened the door to a June rate hike by removing the word "patient" from its policy statement. However, the Fed sounded more pessimistic about the economy. In the January statement, the Fed said the "economic activity has been expanding at a solid pace". In today’s statement, the Fed said the "economic growth has moderated somewhat." In the new forward guidance language, the Fed made it clear that it would not raise rates unless it sees " further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term." Thus, if we don’t see improvements in the economy, there’s little chance of a rate hike in June.
The FOMC also released its new economic projections. These new projections suggest the Fed will probably not start hiking rates in June. First, future inflation rate projections for 2015 and 2016 were reduced. For the end of 2015, the core PCE is projected to range from 1.3% to 1.4%. This is down from the December’s projections of 1.5% to 1.8%, and it’s much lower than the 2% target rate. A similar reduction was made for the 2016 projections.
Like inflation projections, GDP projections also fell. In fact, GDP projections went down in 2017 in addition to 2015 and 2016.
These lower inflation and GDP projections were likely the reason for the downward projections of the target range for the federal funds rate. The dot plot at the end of the projections document showed that fewer rate hikes are expected in the next few years. For example, no FOMC participant is now expecting the Federal funds rate to be over 4% by the end of 2017. In December, three participants were projecting a Fed funds rate to be over 4%.
The Fed Chair Janet Yellen held a press conference after the FOMC meeting this afternoon, and she made it clear that the removal of the word "patient" from the statement doesn’t mean that they will be impatient regarding a rate hike. They’re in no rush to increase rates.
Future FOMC Meetings
The next two FOMC meetings are scheduled for April 28-29 and June 16-17. The June meeting will include the summary of economic projections and a press conference by Chairwoman Yellen.