Timing the Fed’s Rate Hike

by Don Gould and Derek Baldwin, CFA

Ahead of the March FOMC meeting, many observers were looking for more guidance on the likely timing of the Fed’s first rate hike. Shortly after the Fed’s March press release, financial headlines focused on removal of the word “patient” from their statement, meaning that the Fed now feels it can raise rates without much warning. (For the full statement, see link at bottom.)

However, the Fed also acknowledged some slowing in the US economy’s rate of growth, as well as a softening in inflation numbers, implying that it likely won’t raise rates until it feels more confident on both scores.

Stocks and bonds rallied on the announcement, suggesting that the market had already priced in the “patient” factor, but not so much the cautionary note on the economy and inflation. In the short run at least, continued low interest rates support stock and bond prices.

The Fed reiterated that the timing of any rate hike will depend on both real-time and forecasted economic indicators. The Fed’s two key economic objectives are maximum employment and price stability. (Price stability is a bit of a misnomer, as the Fed explicitly targets a 2% inflation rate.) Labor markets continue to improve, but the Fed still sees underutilization, i.e., too many people who can and want to work that are either unemployed or underemployed. Meanwhile, the plunge in energy prices has pushed inflation to zero, while also severely dampening activity in the energy sector.

Bottom line: the Fed could move quickly or not at all. It depends on the data, so stay tuned.

The Fed’s March Meeting Statement

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