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Current Views

Everything but the Data

The Federal Reserve Open Market Committee (FOMC) finished their two-day meeting and released their usual statement Wednesday, with Chair Janet Yellen hosting a press conference afterward. 

Their statement and Fed Funds Rate forecasts remain largely unchanged, reflecting the fact that economic data has been slightly more upbeat in the last month or so, though 2015 growth forecasts were lowered, and unemployment expectations were raised higher, given the weakness realized in the first quarter. So, all in all, no real news here. 

Currently they are not compelled by the data to raise rates yet. While they continue to warn of rates moving higher at some near point, they are establishing expectations of a plodding path to get there. Further, the Fed member’s individual forecasts on the future path of rates over the next year vary widely, highlighting that there is no consensus view at the Fed of either the timing or scope of future interest rate hikes. 

In reflecting the weaker first quarter, the Fed anticipates real GDP at 1.9% for 2015. They also foresee the central tendency of real growth to range from 2% to 2.3% over the longer run. At the same time, they see unemployment at 5.25% at year-end, reasonably consistent with their longer-term views of 5% to 5.2%. In inflation data, they expect to see the Personal Consumption Indicator at 0.7% this year compared with a long-run projection of 2%. 

None of these are figures that would immediately cry out for an emergency level of zero interest rates. Yet, that is where we remain. The Fed does not believe a rate increase is warranted just yet, and claims there is no preset plan but data dependency. Like us, they continue to monitor both economic data and market movements, as well as external factors such as the Greek debt drama. 

While the Fed did not provide a clear sense of their timing, they did urge us to adopt the mindset that a rate rise will be “gradual” over time. Given the market’s recent fits and starts, our FOMC is being very cautious.

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