The Federal Open Market Commission released its updated economic projections for the next two years on Wednesday, slashing GDP forecasts for 2015, while showing a mildly hawkish medium-to-long-term outlook on the economy.
Meanwhile, the Federal Reserve announced that it would keep interest rates near zero for the time being, although it indicated that there is a high likelihood of an initial rate hike this year. Fifteen of 17 Fed policymakers expect an initial rate hike this year, with 10 predicting two increases before the end of 2015.
Here’s what a few experts had to say.
Adam Sarhan, CEO Of Sarhan Capital
Sarhan sees the FOMC release and Janet Yellen’s press conference as “more of the same.”
Once again, he notes, the Fed maintained that it was data dependent. In addition, he says that Janet Yellen provided herself “the perfect hedge” by saying that the Fed would raise rates if data improves and keep them low if it does not. Sarhan believes, furthermore, that Yellen has not yet ruled out QE4 as a possibility.
With regard to Yellen’s statement that the timing of a rate hike wouldn’t be as important as the pace of future increases, Sarhan thinks that the assurance is simply a ploy to reduce market volatility. He notes that, in the past, the central bank would raise and lower the federal funds rate target “without anyone really blinking an eye.”
Now, however, because of the market’s increased interest rate sensitivity, a raising rates is “like taking candy from a kid” and could prompt a tantrum from investors. Sarhan thinks that Yellen is just trying to avoid such a backlash.
Generally speaking, Sarhan didn’t see anything from the Fed on Wednesday that indicates that “they’re going to move the needle.” In his opinion, “they’re doing what Europe is doing with Greece….kicking the can down the road.”
Tim Anderson, Managing Director At TJM Investments
Anderson notes that some observers may be surprised to see that there was no dissent within the Fed on the decision not to raise interest rates this month.
He expects the eventual rate hike to come in September at the earliest. He thinks that the governors will want to raise rates at a time when they have a quarterly press conference scheduled, which they can use to explain the choice and hopefully ease market worries.
Anderson attributes the market reaction to the Fed announcement as primarily a result of a weakened dollar. He says that the dollar probably dropped in value due to the FOMC’s softened GDP projections for the current year.
This is certainly not the last investors will hear of interest rates, as the topic is likely to dominate conversation around every major domestic economic indicator until at least the first hike.
Joe Brusuelas, Chief Economist At McGladrey LLP
Brusuelas believes that the Fed “sent a clear signal to investors that it is ready to start the rate hike campaign in 2015.” He also finds the “moderately hawkish” economic projections notable, especially against dovish expectations.
He expects long-term interest rates and mortgage rates to climb as the Fed considers when to raise the target for the federal funds rate.
Brusuelas thinks that, given the current trajectory of the economy and a tightening labor market, two rate hikes before the end of the year would be appropriate. He predicts two labor hikes early next year as well, before the Fed adjourns from major policy decisions in advance of the presidential election.
The one event that could derail the Fed’s schedule, he says, is a Greek default. According to Brusuelas, a Grexit from the Euro would likely require the central bank to push back a hike in order to protect against “roiled asset markets.”