Tags: Fed | patient | rate | growth

Fed Loses Patience Because Their Ideas Aren't Working

By    |   Friday, 20 Mar 2015 08:27 AM

Patience is no longer considered to be among the Federal Reserve's virtues after the Fed dropped the word "patient" from the widely watch statement about this week's meeting.

Initially, traders seemed to be impressed that a new Fed policy was emerging, but within 24 hours they realized the Fed was admitting defeat and gains in the dollar were completely reversed. Stocks and bonds gave up a large part of their post-meeting gains.

Traders seemed to review all of the Fed's statement overnight. While dropping the word "patient" drew a great deal of attention on Wednesday, the Fed also updated its economic assumptions. Here we see that even with growing impatience, the Fed is unlikely to hike interest rates by much because the economy is still struggling to grow.

Estimates for GDP growth for 2015 were cut to a range of 2.3 to 2.7 percent from the December projection of 2.6 to 3.0 percent. Inflation is expected to remain low even as unemployment is expected to continue to drop in the next two years. This assumption indicates wages will remain low despite improvements in the job market.

Because the economy remains in a slow-growth mode, the Fed actually cut its interest rate forecasts. By the end of this year, the Fed expects the Fed funds rate to increase from 0 to 0.25 percent to 0.5 to 0.75 percent. Three months ago, they expected the rate to rise above 1 percent.

This forecast highlights the Fed's problem. Low rates are not increasing the pace of economic growth and there is no reason to raise rates until the economy improves. Until the economy recovers, rate hikes just aren't needed and the Fed will not make significant policy changes for some time. It will probably be at least a year until we see rates above 1 percent.

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MichaelCarr
Patience is no longer considered to be among the Federal Reserve's virtues after the Fed dropped the word "patient" from the widely watch statement about this week's meeting.
Fed, patient, rate, growth
303
2015-27-20
Friday, 20 Mar 2015 08:27 AM
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