The Federal Open Market Committee (FOMC) chose to keep short-term interest rates unchanged, as expected, at its March 15–16 meeting. Coming into 2016, conventional wisdom held that the Federal Reserve would raise the federal funds rate as much as four times this year, building on the 25 basis point increase made at its December 15–16 meeting. Yet, in the interim, the global economic environment has been highly volatile, with softer-than-desired economic activity and lingering outlook worries among businesses. (See, for instance, the most recent NAM Manufacturers’ Outlook Survey, which was released last week.) In the FOMC’s statement, participants acknowledged these challenges, but also noted that “economic activity has been expanding at a modest pace.”
With that said, the Federal Reserve also released its economic projections, and these data make it clear that FOMC participants had slightly downgraded their forecasts for growth for 2016 and 2017. The Fed now predicts 2.2 percent real GDP growth in 2016, down from 2.4 percent in December, and 2.1 percent growth for 2017, down from 2.2 percent. They also expect the unemployment rate to fall to 4.7 percent in 2016 and to 4.6 percent in 2017. In addition, core inflation is seen remaining below 2.0 percent. Yet, the Fed also expects inflationary pressures to pick up from currently low levels as the effect of energy price declines and the labor market improves further.
From a financial markets perspective, the economic projections also provide a signal about the number of future rate increases. Participants now see the effective federal funds rate rising to 0.9 percent by year’s end, down from 1.4 percent in December. Given that the current target range for the federal funds rate is between 0.25 and 0.50 percent, this would suggest two more increases in 2016, instead of four as predicted in December. As such, this keeps a rate hike at either the April 26-27 or June 14–15 meetings on the table, with the latter being more likely. The Federal Reserve will be looking for broader progress in the U.S. economic data, and hopefully, this includes improved manufacturing activity.
Looking further into the future, the FOMC now sees the fed funds rate rising to 1.9 percent and 3.0 percent in 2017 and 2018, respectively. This would indicate roughly four rate increases in each of the next two years.
Note that there was one dissention. Kansas City Federal Reserve Bank President Esther L. George would have voted to raise the federal funds rate to 0.50 to 0.75 percent.