January 26, 27 2016 FOMC Meeting
In a Nutshell:
“Fed to Markets: It’s the economy, all of it, not just part of it and it’s not the financial markets.”
Fed funds rate range maintained at 0.25% and 0.50%
Yes, even Central Bankers can learn their lessons. In September, the Fed seemingly backed off starting to raise rates because of financial and emerging market issues. The FOMC was blasted for taking its eye off the ball and the criticisms were well founded. Well, message received, though this time around, the financial markets were begging for the Fed to backpedal as rapidly as possible.
The statement released kept rates stable, which no one thought was on the table anyway. But what people debated was whether the chaos in the financial markets and the uncertainty surrounding the Chinese economy would cause the FOMC to signal that a rate hike in March was off the table. In no way was that signal sent and I assume from the negative reaction in the markets, that message was received.
The statement was generally positive about the consumer, business investment and the labor market. Members continued to be concerned about inflation being below target but still believe it will “rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.” As for the rest of the world, it was not surprising that the “Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” That is, it’s a concern, but not yet a major concern.
As for future policy, about the only thing that may dissuade the members from raising rates at one of the next two meetings is a decline in inflation expectations. Inflation has been the dividing line in the discussions and though everyone voted for the statement, a deterioration in the medium term inflation outlook, which is not expected, could slow the pace of rate hikes.
To sum up, the Fed didn’t tell the markets that if they behave badly the Fed will come to the rescue. I have consistently said I expect the next rate hike to be in March and I am standing by that forecast. Nothing in Wednesday’s statement argues against that possibility.
(The next FOMC meeting is March 15-16, 2016.)
Joel L. Naroff
is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.
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