US FED KEEPS RATE UNCHANGED; TWO RATE CUTS IN 2016 AND NOT FOUR

By Ruma Dubey

The much-awaited though widely expected decision from the US Federal Reserve is in – no rate hikes. This is what everyone already knew but what was eagerly awaited was the number of rate hikes in this year. Well,  good news on that front – from a maximum of four rate hikes  as announced in December, it has now been scaled down to two increases this year. This clearly means, do not expect a rate hike any time soon, not in the April meet for sure and maybe not in June too as earlier expected.

A quick run through the highlights of the Fed statement and Yellen's Press Conference:

• Kept the target range for the benchmark federal funds rate unchanged at 0.25 to 0.5%.
• The median of policy makers’ updated quarterly projections saw the rate at 0.875 % by Dec 2016 – meaning two 0.25% increases, down from four.
• Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation.
• Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2% over the medium term.
• Economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months
• The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
• The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

• Prudent to maintain current policy stance at this meeting

• Expect 2% inflation target to be reached in 2-3 years

• Median GDP estimates at 2.2% for 2016, 2.1% for 2017 and 2% for 2018

• Outlook has not changed much since December’15.

• Yellen says, “Further rate increases will prove appropriate over time ... and that the pace will be gradual”.

   

So it was a ho-hum kind of statement though the number of rate cuts coming down to two was good news. The rest of the statement was very much what one expected. The European Central Bank’s decision last week to ease monetary policy last week could have also prompted the Fed to go slow as it signaled that the ECB had taken the necessary steps to revive the flaying growth in Europe thus stemming some of the global turmoil.

The US markets were happy and they were at their intra day high levels while Yellen spoke. For us in India, this does not mean much except for a momentary celebration; it will be life as usual tomorrow morning and markets as usual. It could celebrate the passage of the Aadhar Bill as it indicates that the reform process in a small way has taken off. It also went on to show that if the PM puts his mind to it, any Bill, even the GST can get through in this Budget session.

The markets will celebrate this news for some time and might once again start looking around for new triggers. We could see some renewed support coming in from the FIIs. All eyes will now be on the RBI – will Rajan reduce rates on 5^th April?