The potential hike was postponed after fears of a slowdown in China and collapsing oil prices have rattled investors worldwide.
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“Inflation picked up in recent months; however, it continued to run below the committee’s 2% longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports”.
In explaining its decision on interest rates, the FOMC said that current monetary policy supports further improvement in labor market conditions and a return to the target inflation level of 2 percent. She would not rule out the possibility of an April rate hike.
But Yellen told a press conference after the FOMC meeting that she was unconvinced by apparent upward price pressures.
Forecasts now centre on two 0.25-percentage-point rate rises this year, rather than the four projected in December when the Fed raised rates for the first time in nearly a decade. Rates-wise, there’s a vacuum until we hit 109 yen, beyond that it’s the 105s.
On the surface, markets are understandably relieved that the large gap between futures market interest rate expectations and the Fed’s own forecast have closed dramatically over the past year.
The team at Capital Economics is also looking for the Fed to turn more hawkish soon with an expectation for a June rate hike followed by an acceleration in inflation that will “force the Fed to raise rates much faster than is widely appreciated”. The lone dissenter was Kansas City Fed President Esther George, who favored a quarter-point rate hike.
Yields fell after Federal Open Market Committee officials cited the potential impact from weaker global growth and financial-market turmoil on the USA economy in a statement at the conclusion of their two-day meeting. Lower rates are a boon for gold, which becomes more competitive against interest-bearing assets.
“I’m somewhat surprised we’re not seeing more of a pickup in wage growth”, Yellen acknowledged.
Ms Yellen and her colleagues have singled out uncertainty over China’s outlook as a risk to U.S. growth. “The domestic data, as of right now, are not unduly alarming”.
“If events continue to unfold in that way we are likely to continue to gradually raise rates over time”.
Inflation, a key economic gauge and factor in the Federal Reserve’s interest rate evaluation, remains below where analysts thought it would be. Fresh projections showed a majority of its policymakers were comfortable with two quarter-point rate rises by year’s end, half the number seen in December.
“Instead of four hikes this year, their median prediction is now for just two hikes”.
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“It was much more dovish than anyone was expecting”, said Gemma Wright-Casparius, head of the Treasury and inflation team from the Valley Forge, Pennsylvania, trading floor of Vanguard Group Inc., which manages $3.4 trillion.
