The Fed’s December rate hike had raised expectations of several more increases this year, with the first as early as March.
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“I think the FOMC statement tried to tread the line between being hawkish and dovish and it stopped sort of indicating that the Fed was in a wait and watch mode”, said Thomas Simons of Jefferies.
Household spending and business have increased “at moderate rates in recent months”, the Fed added in a slight downgrade from its December description.
USA interest rates futures implied traders see a 29 percent chance the Fed will raise rates at its next policy meeting in March, down from 31 percent late on Tuesday, according to CME Group’s FedWatch programme.
“This is meant to lull us into lower expectations as to when the next move is going to come”, said Patrick O’Keefe, director of economic research at the accounting and consulting firm CohnReznick.
In December, Fed policymakers nudged up the central bank’s benchmark short-term interest by 0.25 percentage point.
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The Fed’s statement said it was studying “global economic and financial developments and is assessing their implications for the labor market and inflation”.
Some economists expected the Fed to more clearly voice concerns that the global and market developments could crimp the USA economy, a view it expressed in September when China’s stumbles similarly rocked markets.
Ian Kernohan, economist at Royal London Asset Management, says the Fed “wants to keep its options open” and wait for the global economic outlook to improve. “But if things were to turn around in the global market in the near term, a rate hike in March will not be off the table”, said Thomas Simons. Soon after the Fed disclosed its statement, the dollar weakened against the majority of its peers.
Even though the Fed mentioned a recent slowdown in the economy, it still highlighted continued improvement in the labor market.
Inflation remains well below the Fed’s target rate of 2 percent, something Fed board members expressed concern about recently. A Commerce Department report showed sales of new single-family homes jumped 10.8% to a seasonally adjusted annual rate of 544,000 houses, the highest level in 10 months.
In contrast, James Bullard, president of the St. Louis Fed, sounded a more cautious note on January 14 by saying the latest decline in oil prices may delay the return of inflation to the central bank’s 2 percent target.
In Europe, the FTSE 100 index of leading British shares was down 1 percent at 5,935 while Germany’s DAX fell 1.6 percent to 9,724.
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So commercial real estate (and other) lenders and borrowers can probably expect stable rates for the foreseeable future, or at most a slow rise over the year. But it signaled that a seven-year period of near-zero rates was ending and that while borrowing costs wouldn’t be rising fast, they would be headed steadily up.
