The Fed, as expected, didn’t rock the boat with a rate hike; nor did it back down from its stance to raise rates this year. So what else is new? Well, the Fed address the high volatility in the financial market, slower growth in U.S. economy, and global economic woes. Inflation hasn’t picked up and inflation expectations are still subdue at well below the 2% target. But given these concerns and given the lack of hawkish tone, which was more prominent in the previous statement, the market thinks the Fed is slowly backing down from its previous outlook to raise rates 4 times in 2016. Based on the implied probabilities in the bonds market, the market estimates the Fed’s fund rate will reach 0.55% by the end of 2016 – nary one hike this year.
The Fed has a dual mandate: Keeping inflation low and full employment. For the former, a rate hike isn’t warrant; for the latter, there is a case to raise rates. But if the NFP reports start to show lower numbers of jobs added and more importantly slower increase in wages, this could persuade FOMC members to hold off from raising rates anytime soon.
What’s next?
In the next meeting the Fed is expected to raise rates – if it plans to keep its direction of raising rates every other meeting. For now, it seems very unlikely and if the economic gloom and bearish market sentiment persists, the Fed may eventually not raise rates at all in 2016.
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