No Rate Increase: 3/16/2016

You may have heard, the FED earlier today elected to leave interest rates unchanged.  I was not surprised by this choice.  The FED opined:

“The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.  However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to 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.”

I highlighted an important sentence:  The FED is concerned – for good reason – about other countries and their potential impact on the US economy.  Their concern is primarily around the potential ‘contagion’ from other under-performing economies. (Read:  China)  Remember that today the economies of most countries are intertwined, interdependent.   The old joke that “when the US sneezes, the world gets a cold” no longer only applies to us.   In fact, the bout of fear striking the financial markets earlier this year were mostly the result of sneezing in China.

Along with the statement, the FED released updated forecasts.   Here is a portion of that forecast:

You’ll note two lines for GDP, Unemployment, the PCE, etc.  The top line is today’s forecast…the lower line reflects their December forecast.   Just a few months ago.

You’ll see three significant changes in FED expectation:

1. GDP:  Back in december, they envisioned stronger, more robust growth.  No longer.  A 2/10 percent reduction in GDP expectation is telling.
2. 2016 Inflation:  This is a huge reduction in their forecast.  From 1.6% down to 1.2%.  This suggests their attempts to ‘reflate’ the economy are not working – yet.
3. 2016 Federal Funds Rate:  Again, a huge reduction.  In December, they expected their short term rate – the FED funds rate – to be 1.4% by the end of 2016.  Now, they expect only .9%.   Another indication that (1) inflation is well contained and (2) interest rates will be remaining low, longer.

The FED is telling us expect ‘more of the same’ for quite a while.  Relative stability in GDP, unemployment, inflation and interest rates.

In general I agree.  I feel we need to keep a close eye on labor markets…and watch for ‘wage inflation’.   But this minor concern aside (I’ll talk more about this later), I feel the FED is spot on.  For now.

• Terry Liebman