Fed Leaves Rates Unchanged

Key Points

  • The Fed's decision to keep rates steady was unanimous
  • The statement highlighted rising business and consumer confidence, but kept a lid on enthusiasm about capital spending
  • Expectations for future rate hikes eased in the immediate aftermath of the statement’s release

In a unanimous vote, the Federal Open Market Committee (FOMC) left interest rates unchanged at its two-day meeting which concluded today; however the statement noted rising confidence among business leaders and consumer in the period since the election.  What we have been highlighting is that the confidence bar has indeed been set higher; which also raises the risk that actual activity under-performs that higher bar. The Fed itself may be skeptical given that the statement's wording around business fixed investment did not change, even though there was some acceleration in last year’s fourth quarter.

They also noted their expectations for "some further strengthening" in the labor market and a return to their 2% inflation target (they were more definitive that the target would be reached relative to the December meeting's statement).  The FOMC reiterated its desire to raise rates gradually; but noted that job growth "remained solid," with the unemployment rate having "stayed near its recent low."  That last comment was a tweak from the December meeting's statement, which noted that the rate had "declined."

There was no change to the section about the Fed’s balance sheet, which is expected to be left unchanged "until normalization of the level of the federal funds rate is well under way."  Kathy Jones, Schwab's fixed income strategist, will be keeping our investors informed on our views about the Fed’s balance sheet and the timing of its reduction.

Expectations for a rate hike at the next meeting in March were 42% immediately prior to the Fed's announcement, but shortly thereafter, they fell back.  Based on Bloomberg's World Interest Rate Probability (WIRP) screen at 2:45pm ET—it adjusts constantly—the chance of rates rising at the remainder of this year's meetings are as follows:

            March 15         32%

            May 3              49%

            June 14            73%

            July 26             78%

            September 20  86%

            November 1    88%

            December 13   94%

 

Our view had been that a March rate hike could be on the table; however if the probability does not rise to at least 50% before the meeting, we would expect the Fed to hold off until May or June.  As always, the probabilities remain data-dependent.

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