The Fed: No Longer Patient, But Also Not Impatient

The FOMC concluded a two-day policy meeting with a statement that included an updated summary of interest rate and economic projections and a press conference by Fed Chair Yellen. The series of events was characterized by economists and market participants as “dovish,” because the Fed indicated that ultra-loose monetary policies may be in place for longer than the market expected. While the Fed removed the word “patient” from their statement as it relates to the first rise in interest rates, Yellen made it clear that the Fed is not growing impatient to raise rates, and that the FOMC will continue to evaluate incoming economic data before making a decision. The biggest news from our perspective was not the statement or press conference, but the chart showing where FOMC members expect interest rates to be over the coming years. The median expectation for rates at the end of 2015 fell 41 bps to 0.74%, 2016 fell 68 bps to 1.89% and 2017 fell 38 bps to 3.2%. These median rate expectations are closer to the market expectation of future rate levels and serve as a good reminder that the Fed’s projections are sometimes “hopes” rather than “expectations.”  The Fed mentioned that inflation is a concern, and because there are few apparent inflationary pressures building, we agree. They also expressed concern over the strong dollar and its impact not only on inflation, but also on economic growth. All of this information offers us reassurance that 2015 may be another good year for bond investors, and we are positioning our portfolios accordingly.
    
Sources: Federal Reserve, RBS