During the past week, investors have been anxious over what the Federal Reserve would say after the conclusion of the Federal Open Market Committee (FOMC) meeting on March 18th. Investors were worried that the Federal Reserve would change the wording of the press release to indicate that they were planning to raise short-term interest rates (i.e. the federal funds rate) sooner than anticipated. Debate raged as those who chose to focus on the strength of jobs growth argued that the Federal Reserve would make their first rate increase in June, while those who focus on inflation and the other economic data argued that the Federal Reserve would wait until September or later.
After all of the wait, the FOMC meeting concluded today and at 11:00am (Pacific Time), they issued their press release. For those hoping for clarity, they were probably disappointed. As expected, they dropped the wording that they can “be patient in beginning to normalize the stance of monetary policy” but they did not give any indication of a timetable for the first rate increase. The only clarity they provided was the statement that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”
So, does that mean that an increase in the federal funds rate is likely after their June meeting? The Federal Reserve refused to answer that question and be painted into a corner. Their guidance was as follows: “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 labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.” Debate will probably continue regarding the timing for the first rate increase.
From my perspective, the Federal Reserve has been pretty clear about their intentions if you pay attention to their press releases and speeches. The Federal Reserve has been clear that they are not going to be painted into a corner by giving a specific timeframe or a specific measurement. They learned their lesson when former Chairman Ben Bernanke tried to be more specific. During his tenure he first indicated a specific unemployment rate that would trigger a rate increase and then had to backtrack when the economy did not improve at the same pace as the rate of improvement in the unemployment rate. Chairwoman Yellen learned a similar lesson when she gave a specific timeframe during one of her first press conferences and then had to back away from that timetable.
The Federal Reserve continues to tell the investment community that the timing of when they will raise the federal funds rate is completely dependent on the economic data. Right now, I believe that the Federal Reserve is uncertain as to whether the slowdown that the economy is showing in the first quarter is temporary or the start of something more concerning. They also recognize that inflation is being impacted by lower oil prices. The Federal Reserve’s press release indicates that April is too soon. That makes sense if they are worried about the first quarter slowdown. June may well be too soon as well, since the reality is that the only sector of the economy that has shown true strength recently is jobs growth. Wage growth shows signs that it may start to pick up but that has not yet occurred. So far, consumers have not used their savings from lower gas prices to buy more goods. Instead, they have used it to pay for rising medical expenses, rebuild their savings or start to pay down debt. Housing has started the year very slowly (probably weather related) and manufacturing has clearly been suffering from the stronger dollar.
Unless these areas start to show a rebound soon, then June is probably too early as well. September still appears to be the most realistic timeframe for the first increase in the federal funds rate but between now and then, the Federal Reserve will probably keep investors guessing as to when they will actually raise short-term interest rates.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.