Chart Of The Week: Be Patient! The FOMC Sends A Nuanced Message But Remains On Course For A September Hike

Market participants seem to be unsure whether to interpret the March FOMC statement as dovish or hawkish. We retain our view that the most likely month for the first move in the Fed Funds rate is September.

REFRESH CHART EDIT CHART

Former Fed Chairman Greenspan would no doubt heartily approve of the uncertainty over the interpretation of the statement. The removal of the word ‘patient’ means that the Fed has opened the door to a rate hike by as soon as June. However, at the same time, FOMC members revised down their projections for growth, inflation and interest rates.

The door is open to a June hike, but they are not compelled to step through it. On balance, markets judged the statement as being slightly dovish – bond yields fell and markets pushed back expectations for a rate hike slightly. We retain our view that the most likely month for the first move in the Fed Funds rate is September – our reading of the Fed has not changed as a result of the March meeting. Our chart shows how the FOMC’s dots – measured as the median of the year-end projections for the Fed Funds rate by the Federal Reserve Board Members and Presidents – has shifted down.

However, all this has done is remove the substantial disconnect between members’ projections and the market (and ourselves).
With the removal of the word ‘patient’, the timing of the rate hike decision will be data dependent. The Committee is clear that it will raise rates if the labour market continues to tighten and it is confident that inflation will move back towards 2%. Our own projections see core CPI inflation reaching 2% by August of this year.

Receive stories like this to your inbox as they are published. Subscribe here and follow us @Alpha_Now on Twitter. If you are looking to access Thomson Reuters data or analytics, register for a free trial.