What Implies From the Fed’s Hesitation on Hiking Rates

April 18, 2016

By: Yingda Li

Fed Chair Janet Yellen relieved the fear of many investors on Tuesday when she confirmed that the Fed would proceed with caution. Dating back to March 17, 2016, the Federal Reserve kept its federal funds rate in the range of 0.25 to 0.5 percent unchanged, saying that monetary policy stance will remain accommodative so as to further improve labor market conditions and provide support for returning inflation to 2 per cent support. It should be said exactly this decision and before the market expectations, the market still made obvious response: the dollar index plunged 110 points; US oil rallied nearly 6%; gold jumped $ 25.

The recent series of indicators (including strong growth in employment, etc.) indicates that the job market is further enhanced. Or to say unemployment rate is turning positive. Another is the inflation rising in recent months, but remaining below the long-term goal of the FOMC, which partly reflects the fall in energy prices as well as prices of non-energy imports. The global economic and financial situation is to continue going with risk. The recent inflation is expected to remain at low levels, in part because energy prices fell further; but with energy prices and imported products affect the temporary employment market and inflation will rise in the medium term to 2%. FOMC expects the development of the economic situation can only make it reasonable to gradually raise the federal funds rate; over a period of time, the federal funds rate is likely to remain below the long-term average level. However, the actual path of the federal funds rate will depend on future economic data prospects.

In fact, since the Fed bid farewell to the era of Greenspan, the Fed’s monetary policy reflects the high degree of transparency and predictability, which is in a way conducive to market anticipation and stability. From whichever the Fed’s resolution or Yellen conference declaration, we can indicate the following:

First, the global economic risks predict higher than in December 2015, in particular on oil prices to new lows before the question, feeling significantly beyond the Fed’s previous expectations. Increased risk of a further slowdown means that the rate hike expectations;

Second, expectation to hike interest rates in 2016 is softened due to cutting interest rate raise from previous four times to the 2 times for the year. Although Yellen hinted April does not rule out the possibility of rate hike, but in the current situation, the April rate hike may not be probable;

Third, the rate hike will come sooner or later because in addition to inflation, US employment data is still strong. If long-term low interest rates will bring future economic risks. The Fed is expecting 2-3 years’ inflation to 2 per cent, which means that we don’t exclude that Fed does not raise interest rates in 2016 but rather maintains the current interest rate policy. But days after the United States announced in February core CPI up 2.3%, the biggest increase since October 2008, further demonstrates the Fed’s inflation is approaching the target, so the Federal Reserve on interest rate policy emphasizes on watching future “actual data”.

Fourth, the Fed does not raise interest rates in line with market expectations. Despite the decision, yet in quite a long time Fed will maintain cautious about risk, meaning that interest rate policy will be kept in the “wait and see” attitude. This tactic can contribute to elimination of global market turmoil caused by the Fed. On the other hand it also show that the Federal Reserve having observing a quarter of global economic performance in 2016 did not dispel concerns about the global economy in 2016 and will continue to seek breakthroughs under uncertainty and anxiety.

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