Fed opens door wider for rate hike but downgrades economic outlook

Friday, 20 March 2015 00:01 - - {{hitsCtrl.values.hits}}

Reuters: The Federal Reserve on Wednesday moved a step closer to hiking rates for the first time since 2006, but downgraded its economic growth and inflation projections, signalling it is in no rush to push borrowing costs to more normal levels. The US central bank removed a reference to being “patient” on rates from its policy statement, opening the door wider for a hike in the next couple of months while sounding a cautious note on the health of the economic recovery. Fed officials also slashed their median estimate for the federal funds rate – the key overnight lending rate – to 0.625% for the end of 2015 from the 1.125% estimate in December. The cut to the so-called “dot plot,” together with other economic concerns cited by the Fed, sent a more dovish message than investors were expecting, and pushed market bets on the central bank’s rate “lift-off” from mid-year to the fall. “Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient,” Fed Chair Janet Yellen said in a press conference after Wednesday’s statement. Stocks on Wall Street surged and oil prices jumped as much as 5% after the Fed statement. The dollar tumbled against other major currencies and the US 10-year Treasury yield dipped below 2% for the first time since 2 March. In its quarterly summary of economic projections, the Fed cut its inflation outlook for 2015 and reduced expected US economic growth. The policy statement repeated its concern that inflation measures were running below expectations, weighed down in part by falling energy prices. “I just don’t see any price or wage pressure out there,” said Craig Dismuke, Chief Economist for Vining Sparks. “June is not off the table but it’s unlikely. September is the most likely time for the first rate hike. They might get one hike in this year, maybe two.” The Fed noted that a rate increase remained “unlikely” at its April meeting and said its change in rate guidance did not mean it has decided on the timing for a rate hike. Yellen told reporters that a June move could not be ruled out. The Fed statement, however, allowed enough flexibility for the central bank to move later in the year, stressing that any decision would depend on incoming data. “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 labour market and is reasonably confident that inflation will move back to its 2% objective over the medium-term,” the Fed said.

Asia stocks surge, bond yields tumble on Fed caution

Reuters: Asian shares enjoyed their best session in 18 months on Thursday as investors priced in a later start and a slower pace for future USrate rises, slashing sovereign bond yields from Japan to Australia. The shift in rate expectations hit the dollar hard at first, though the damage lessened as the session wore on. The formerly friendless euro had found itself as high as $1.10625 in wild trade on Wednesday, only to fade to $1.0767 in Asia. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.6%, its largest daily gain since September 2013. Australia’s main index jumped 1.9% led by banks as markets wagered on lower domestic rates. The only laggard was the Nikkei which slipped 0.2% in reaction to a firmer yen. Short-term US yields boasted their biggest drop in six years after the Federal Reserve trimmed forecasts for inflation and growth, and said unemployment could fall further than first thought without risking a spike in inflation. The median projection for the Fed funds rate at the end of 2015 was cut to 0.625%, down half a point from December. Fed Chair Janet Yellen also sounded uncomfortable with the strength of the dollar, saying it would be a “notable drag” on exports and a downward force on inflation.