The Fed’s dovish turn coming out of its March 15-16 meeting took many market participants by surprise. The Federal Reserve’s median projection for Fed Funds rate increases in 2016 fell from four in December to two, reflecting concerns about the impact of lower global growth and tighter financial market conditions on US GDP and inflation.
The median forecast for core PCE inflation at the end of 2016 remained unchanged at 1.6%, while the forecast for headline PCE fell from 1.6% to 1.2%. Finally, perhaps in recognition of relatively moderate wage inflation, the estimate for longer run median NAIRU (non-accelerating inflation rate of unemployment) was reduced to 4.8% from 4.9%.
The Fed took these decisions despite having up to the minute economic and market data that should have, in our view, allayed their concerns about the impact of both global growth and tighter conditions on US GDP and inflation. Recent US GDP, employment and inflation data have remained stable or are somewhat better than December levels, despite lower global growth. Having recovered from the early year sell-off, financial conditions on March 15, the day prior to the release of their statement, remained similar to those observed in December, when the Fed decided to raise rates. After reviewing the available data, one may conclude that either the Federal Reserve has erred in its current decision, and has given up some of its flexibility to raise rates, or that the Fed decided that their December hike was a mistake.
Below, we have highlighted a number of relevant economic and market levels at December 16, following the release of the Fed’s December statement and projections, and on March 15, prior to their release of their March 16 statement and projections.