The FOMC statement today provided little change and as such was a little less hawkish than expected. The Fed left the words on inflation unchanged despite the recent rise in core inflation and continues to strike a cautious tone here. This was a slight surprise. On growth and the labour market there were only few and broadly insignificant changes.
However, the median projection for policy rate was moved higher by 25bp to 2.5% by the end of 2016 up from 2.25% in March and from 2.0% in December (see table below). Since the market is currently pricing only 1.8% by the end of 2016 the market is now 70bp below the Fed projection.
The projections for growth were revised sharply lower in 2014 from 2.9% to 2.2% but 2015 and 2016 projection is unchanged.
The projection for unemployment was revised marginally lower to 6.1% by year-end and 5.3% by end of 2016, which is below the projection for the long run unemployment rate.
In the press conference the questions centered on the recent rise in inflation, outlook for policy rates and financial stability.
The Fed chairman highlights uncertainty in projections for Fed policy rates. If the economy is stronger hike can come sooner, if the economy is weaker hike can come later. She also highlighted in several answers the uncertainty and it seems the Fed is paying attention to what is happening in the UK and wants to hedge a bit against changes to the outlook.
In response to a question on the recent rise in inflation Janet Yellen said it partly reflected noise and was generally in line with the Fed expectations. In response to a question on whether the Fed would allow overshooting on inflation she said there was still no contradiction between the goals of full employment and inflation at 2% as inflation was still below the target. If there would be contradiction in future, the Fed would follow a balanced approach. If conflict, the Fed would look at how far the deviation was from the policy goal and take that into account in determining policy.
Yellen got several questions on what would happen if the Fed falls behind the curve and would risk having to “shock” the markets at a later stage, as was partly the case last year with the tapering issue. Interesting to see more and more questions on the risk of falling behind the curve. This shows how the tide is turning now that inflation has turned higher.
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