As widely expected, the Fed decided not to raise interest rates on Wednesday at the end of its second scheduled FOMC meeting of the year.
In December it appeared likely that we would see a rate hike in this March meeting. That changed after the global economic slowdown and the market turmoil hit in January. The Fed suggested in its FOMC statement that this was one of the reasons to hold steady:
global economic and financial developments continue to pose risks.
Inflation was another reason the Fed gave for holding steady. However, the Fed did note that inflation has recently been picking up:
Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.
One new voting member on the FOMC is Esther George, Kansas City Fed president. She’s one of the inflation hawks at the Fed, and she was the only one who voted against holding steady with the rates:
Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
According to Reuters’ Fed dove-hawk scale, George is one of three regional Fed presidents who are on the "hawkish" side. The other two are Cleveland Fed president Loretta Mester and St. Louis Fed president James Bullard.
In addition to the FOMC statement, the Fed also released its economic projections which include members’ expectations about future federal funds rates. Those expectations are listed in the dot plot in figure 2. As you can see in the dot plot, the median expectation for the federal funds rate by the end of 2016 is half a percent higher than today’s level. That implies two quarter point rate hikes this year. In December, the median expectation was for four quarter point rate hikes in 2016.
After 2016, the dot plots show a median expectation for the federal funds rate to increase to between 1.75% and 2.00% which suggests four quarter point rate hikes in 2017. In 2018, the median expectation increases to 3.00% which suggests between four and five quarter point rate hikes.
For savers, it’s important to note that Fed rate hikes will be gradual. As the last few months show, it doesn’t take much bad economic news for the Fed to make rate hikes even more gradual. Thus, it may not be wise to give up on long-term CDs.
Lastly, Fed Chair Janet Yellen held a press conference that included a Q&A session. The questions and answers didn’t add much to the FOMC statement and the economic projections. However, one question got my attention. It was the very last question, and it asked if negative interest rates were something the Fed may consider if conditions warrant. Fed Chair Yellen expressed no support for the idea. She summed up by saying "negative rates is not something we’re actively considering." Of course, it’s a possibility the Fed may go down that road sometime in the future in a bad recession, but it’s not something savers should worry about this year.
Future FOMC Meetings
The next three FOMC meetings are scheduled for April 26-27, June 14-15 and July 26-27. The June meeting will include the summary of economic projections and a press conference by Fed Chair Yellen.