YELLEN KEEPS PATIENCE AND THE GUESSING GAME ON

By Ruma Dubey

So the word last time was “patient” when it came to hiking interest rates. And this time around, that word has been dropped and the policy path ahead now looks unpredictable. That statement of assurance has gone and Yellen has now opened the door wide to a rate hike, maybe as early as June or even later on in September. In the ensuing Press Conference, she raised further uncertainty that rate hike could happen any time after April and the new guidance does not mean a rate hike in June, although it does not rule it out. The good news here – rate hike will not happen before June, that’s the only certainty which came forth today.

In the FOMC statement, Yellen has said that an “increase in the target range for the federal funds rate remains unlikely at the April meeting. And it will be appropriate to tighten when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”

A quick look at the highlights of the statement:

• Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.

• The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.

• The change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.

• It reaffirmed its view that the current 0 to 1/4 % target range for the federal funds rate remains appropriate.

• In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2% inflation.

• The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

• This is for the first time since the financial crisis that the Fed is offering no specific forward guidance as to when rate hikes will come.

The Fed also lowered its estimates for real GDP – for 2015 it has come down from 2.6% - 3% to 2.3 to 2.7%; for 2016 it has been lowered from 2.5%-3% to 2.3%-2.7% and for 2017, it has come down to 2%-2.4% from 2.3%-2.5%.

In December, Fed officials forecast the unemployment rate to be 5.2% to 5.3% by the end of this year. Since the rate was 5.5% in February, as expected, the target has now been moved to 5 to 5.2%. So what we are seeing now is a moving target which again shows uncertainty and unpredictability.

How will the Indian markets react to this news? It could be with nonchalance as there is really no direction in this FOMC statement. No one expected April as such but we are now expecting June or maybe not. But a read of the Fed statement implies that it could be delayed till September – that is what the US markets interpreted and stocks surged. That could play on the market sentiments here too and we could move on ahead, heaving sigh of relief and looking for the next trigger.

For a read of the entire Fed statement -  http://www.federalreserve.gov/newsevents/press/monetary/20150318a.htm