Are you surprised that the party on Wall Street is back on? Fed Chair Janet Yellen didn’t take away the punch bowl. She dropped the word “patient” from the post-meeting statement, an indication that the era of zero interest rates was about to end.
Traders were seemingly caught off-side, with many expecting a more a hawkish Fed. The stock market was negative before the announcement and turned positive with the Dow up triple digits, a 350-plus point swing. The Dow ended the day at 18,076, a gain of 227, and the S&P 500 was up 25 at 2099. Gold, oil, the Euro and the Canadian dollar all went up in price as the value of the U.S. dollar dropped after the Fed statement was release. Both short-term & long-term bond prices went up and yields went down.
“Just because we removed the word ‘patient’ does not mean we will become impatient,” Fed Chair Janet Yellen said at a post-meeting news conference.
“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement said.
What was really important were the comments made during the press conference by Fed Chair Janet Yellen. She made it clear that the FOMC is looking for further improvement in the economy. The FOMC members have adjusted their projections lower for economic growth and inflation. Citing a slow housing market, a weakening export market and a lack of wage inflation as some of the main reasons. The stronger U.S dollar has lowered import prices plus the fall in crude oil prices will lower the rate of inflation.
Full-year 2015 GDP projections fell from a range of 2.6 percent to 3.0 percent in December to 2.3 percent to 2.7 percent from this week’s meeting. Core inflation (excluding food and energy prices) dropped from a 1.5 percent to 1.8 percent range to 1.3 percent to 1.4 percent. Headline inflation expectations declined from a 1.0 percent to 1.6 percent range to 0.6 percent to 0.8 percent.
Of the 17 members, including those who do not vote, 15 said 2015 is the right year to being tightening policy, while just two supported waiting until 2016.
I am by no means an expert but here is my 2 cents worth. I think that more data on the health of the U.S. economic is needed before a rate decision will be made. The 4th quarter growth in the U.S. was only 2.6% which isn’t exactly stellar. Consumer spending was negative for both Dec. & Jan. which could lead to weaker growth in the first quarter of 2015. The low price of cruel oil is deflationary and would get worse in an environment of raising interest rates.
If I had to guess, a small rate hike wouldn’t happen until sometime in the fall of 2015 however I do have some cash on the sidelines.