As we noted in yesterday’s FOMC Preview report, any Fed fireworks wouldn’t come from the monetary policy decisionper se, but rather how today’s meeting shaped the conversation around the timing of the next rate hike in the coming months. As of writing in the midst of Yellen’s presser, it’s been the monetary policy doves who are flying high, rather than the hawks.
Focusing on the statement first, the changes were relatively minor relative to January’s release. For what it’s worth, the changes to the statement appear to reflect a more cautious Fed, despite the recent improvements in financial conditions (read: rising stocks). Crucially, the central bank re-introduced comments about “global economic developments,” a blurb suggests that policymakers are hesitant to raise interest rates amidst economic slowdowns in Europe and China.
This caution was borne out in the accompanying summary of economic projections, including the now infamous “dot chart.” Relative to the last big Fed meeting in December, participants revised down their year-end expectations for economic growth and inflation (core PCE) slightly, while also revising down the longer-run forecast for the unemployment rate.
While these updates represented a minor setback for the hawks, the true knockout blow came from the “dot chart” of interest rate expectations. From a median year-end interest rate expectation of 1.25-1.5% in January (representing four more interest rate hikes), the median FOMC policymaker now expects interest rates to be in the 0.75-1.00% range at the end of the year (representing only two more interest rate hikes). After dramatically revising down its interest rate “liftoff” path, it would be extremely hard for the Fed to subsequently go on to raise interest rates three times over the remainder of the year; in other words, two interest rate hikes are the absolute maximum that hawks can hope for this year, and if Fed Funds futures traders are right, a single rate hike is far more likely.
Thus far in her press conference, Dr. Yellen has tried to downplay the changes to the Fed’s statement and projections, stating that the “outlook hasn’t changed much since December.” It’s worth watching to see if she’ll continue to sing from the dovish hymn sheet, but barring a Draghi-esque reversal, it looks like Fed doves are on track to take the day.