March FOMC Meeting: Fed is not impatient

The much-anticipated FOMC meeting for March concluded yesterday with the release of the policy statement and a press conference by Fed Chair, Janet Yellen. As widely expected, the Federal Reserve removed the word “patient” from its language and replaced it with “reasonably confident” that inflation will move back to the Fed’s target rate of 2% in the medium term.

The Fed’s statement was viewed as dovish as the statement highlighted the fact that although job growth remains consistently improving, the fact that inflation has been subdued was the major concern. In its outlook, the Fed also revised its economic forecasts or SEP (Summary of Economic Projections) which saw a downward revised GDP growth at 2.3% – 2.7% from 2.6% – 3% while it expects the unemployment rate to range between 5% and 5.2%.

The median estimates in the Fed funds rate was also lower at 0.625% from 1.125%.

The Fed ruled out a rate hike in April and although the FOMC statement was viewed as being dovish, a June rate hike is still a possibility, although the markets are now expecting at least one rate hike in 2015, which could be sometime in September.

The main point for the Fed was the inflation or Core PCE which has been subdued for the most part on account of the rising US Dollar and the sharp decline in crude oil prices. Currently at 1.3%, the Core PCE is the Fed’s preferred gauge of inflation and has been stubbornly stuck below the Fed’s inflation target rate. The Fed also briefly expressed their concerns that the rising US Dollar was restraining growth while putting downward pressure on inflation, but concluded that the strength of the US dollar was the sign of a strengthening US economy.

All things being equal, future rate hikes are now data dependent rather than time and in the coming months, the markets will be tuned into the inflation data reading which could potentially give clues into the Fed’s rate hike plans.

Market Reaction to FOMC

The US Dollar index saw a sharp sell off during the news release as the market participants viewed the Fed’s monetary policy statement as being dovish.

The Cable managed to close the day on an upbeat note at 1.495 while the Euro closed higher at 1.0825. The Australian dollar closed higher at 0.774 while the Kiwi Dollar ended the day at 0.747. The Yen strengthened on the news against the Greenback closing the day at 120.235. The Loonie also gained against the Greenback, closing the day at 1.2589

Gold futures closed higher at 1167.65 and Silver prices were at 15.937. Oil prices saw a modest rebound closing the day in positive at 43.93.

The equity markets, which were looking week heading into FOMC ended the day in the positive. The Dow Jones Index closed at 18071 while the S&P500 was back near the 2100 level and the Nasdaq was at 4430.