Fed March statement: Wall St weighs in

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The Fed has increased interest rates for the first time since December. The question now: Will we see an uptick in the pace of subsequent rate rises?

After the Fed’s decision to raise rates by 25 basis points, analysts were keen to see if a change of tone appeared in the Fed’s language and economic projections. The Fed, however, stood pat on its forecast for a total of three rate increases this year.

This is what Wall Street economists and analysts thought of the central bank’s decision.

Ian Kernohan, an economist at Royal London, said:

“With the scale, mix and timing of any fiscal stimulus still very unclear, the Fed is right to be cautious with the pace of tightening despite some robust economic data in recent weeks.”

Royal London expects more rate increases this year, which it says “should be supportive of the dollar, given other major central banks are unlikely to tighten policy for some time”.

Paul Ashworth, chief US economist at Capital Economics, noted that the Fed’s median of the interest rate projections “still points to a total of three rate hikes this year, although some individuals who were previously projecting two hikes switched to three, so the average did rise a little”.

“Overall, we still expect that in response to rising inflation, the Fed will hike rates by a total of four times both this year and next, taking the fed funds target range to between 1.50 and 1.75 per cent by end-2017, and to between 2.50 and 2.75 per cent by end-2018.”

Inflation was also in focus on Wednesday.

“Just as important in the Fed’s decision is the rate of US inflation,” said Helal Miah, an investment research analyst at The Share Centre. “Key comments in the statement include the phrase that the risk to inflation is ‘symmetric’, with current core inflation hovering around 2 per cent, but it is clear that the Fed is looking to guard against inflation should it begin to pick up steam.”

Not all analysts thought Wednesday’s move was warranted, however.

“I still think this will be seen as a mistake in the period ahead,” said Steven Ricchiuto, Mizuho chief US economist. “The Fed rushed this move and did so with no change in their macro forecast or assessment of the current environment. Although they left the “Dots” unchanged, the tone of the committee’s forecast turned a bit more bearish.”

“Without any real upside momentum in the core or a broadening out in the inflation base they hiked rates,” he added. “Moreover, they hiked rates and went more fully towards three from two 2017 rate hikes even as the Atlanta Fed cut its Q1 GDP projection to 0.9 per cent.”

Paul Eitelman, multi-asset investment strategist at Russell Investments, also struck a caution tone, saying important risks remain. He forecasts just two rate raises due to the following factors:

  • There is a risk of an equity market pullback.
  • The strength of the dollar could add downside risk for US growth and inflation.
  • There is a “puzzling” slowdown in wage growth in recent months.
  • Real GDP growth was underwhelming in Q4 and looks sluggish in Q1.

“Are we making a mistake by fighting the Fed? Not necessarily,” he said. “It’s important to remember that the Fed has consistently under-delivered the last few years. For example, in late-2014 the Fed forecasted that they would be able to deliver nine or 10 rate hikes by the end of 2016. They only hiked twice.”

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