Stocks and gold jumped higher after the Federal Reserve left its benchmark rate unchanged at 0.25%-0.50% on Wednesday.
Following this announcement, all the major indexes closed up on the day.
First, the scoreboard:
- Dow: 17,330, +79, (+0.5%)
- S&P 500: 2,027, +11, (+0.6%)
- Nasdaq: 4,761, +33, (+0.7%)
- WTI crude oil: $38.50, +6%
The Fed held rates.
The Federal Reserve’s policy-setting committee left its benchmark rate unchanged at the conclusion of its two-day meeting on Wednesday, as was expected.
Here are the major highlights from the Fed’s latest announcement:
- The committee now expects to raise rates only two times this year, down from its previous projection of four.
- The Fed once again brought up the global economy, writing in its statement that, “global economic and financial developments continue to pose risks.”
- The Fed expects inflation to remain low in the near term, partially due to the earlier declines in energy prices. It now forecasts core personal consumption expenditures (PCE) in a range of 1.4% to 1.7%, compared to the previous projection of 1.5% to 1.7%.
- As for the US economy’s outlook, the Fed now expects GDP growth of 2.1% to 2.3% in 2016, down from 2.3% to 2.5%.
Moreover, the committee’s latest dot plot was even more dovish than it was in December. The median FOMC member predicts that rates will remain under 1% at the end of 2016, with a longer term target at just 3.25%.
Assuming that the Fed will continue raising rates 0.25% at a time, that suggests only two more hikes are coming this year. And this downgraded outlook was the biggest news out of the announcement.
Here’s a comparison of the Fed’s March dot plot versus the December dot plot, courtesy of Business Insider’s Andy Kiersz:
Janet Yellen’s press conference.
After the Fed released its statement, Fed chair Janet Yellen held her scheduled press conference in Washington.
Here are some key things she touched upon during the event:
- Yellen said it would be better to raise rates quickly if the economy accelerated rather than to hastily cut rates were the economy to falter. Most FOMC members think rates will gradually rise if the economy continues to improve.
- Interestingly, Yellen said “April remains a live meeting” to raise rates. We’d note that there isn’t a scheduled press conference for that meeting, which casts some doubt on whether the Fed would actually hike.
- Yellen noted that the Fed is not actively considering negative rates. However, she added that the Fed is studying their effects in other countries, including Japan.
- Regarding the Fed’s lowered rate-hike expectations, Yellen said that the Committee felt that achieving its desired economic outcomes would require a lower path of interest rates than seen in December. But, she added, the dot plot is not set in stone.
- She said the Fed could overshoot or undershoot on its 2% inflation target and its tolerance for doing so in either direction is equal. She noted the divergence between survey-based measures of inflation (which have been rising) and market-based expectations (which have been on the low side).
- She reiterated that low oil prices have been a big influence on inflation, and added that if oil moved up to $50 a barrel, it would slightly improve the Fed’s outlook for inflation — although it might not have huge implications for policy.
In other US economic news…
There was a bunch of US economic data earlier in the day as well.
For starters, inflation hit a post-crisis high. The consumer price index (CPI) for February showed that “core” inflation — which strips out the more volatile cost of food and energy — rose 2.3% year-over-year. However, a big drop in the energy index (-6%) pulled down the overall basket of consumer prices, while increases in housing, apparel, and medical-care costs boosted the measure.
Still, the big takeaway here is that this report added proof that inflation is finally starting to pick up steam.
Moreover, housing starts rose more than expected in February, climbing 5.2% to an annualized pace of 1.178 million. However, building permits fell 3.1% in February to a pace of 1.167 million — a larger decline than expected. After the report, Ian Shepherdson at Pantheon Macro said that starts have “overshot” permits, and thus a correction is to be expected in March.
And finally, industrial production and capacity utilization fell more than expected in February. Data from the Federal Reserve showed production dropped 0.5%, while 76.7% of productive capacity was used, down from 77.1%in January.
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