No Federal Reserve official has said it publicly yet, but the central bank raising interest rates four times in 2016, as some policy makers suggested late last year, has about as much chance as a snowball in hell.
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Not too long ago a March rate hike was a virtual certainty, now it will almost certainly not happen.
Analysts have been predicting as much for weeks and that sentiment is now shared by many Fed policy makers. That much is clear from the minutes from the January meeting of the policy-setting Federal Open Market Committee, released on Wednesday. Uncertainty seems to have been the overriding theme of that two-day meeting.
“Members expressed a range of views regarding the implications of recent economic and financial developments for the degree of uncertainty about the medium term outlook,” the minutes state, “with many members judging that uncertainty had increased.”
That’s two ‘uncertainties’ in one sentence.
Uncertainty prompted by reports out of China that the second-largest economy in the world is slowing after years of explosive growth. Uncertainty over the validity of those reports out of China. Uncertainty over how far the price of oil will fall and what that could mean to the global economy. Uncertainty over plunging stock markets in the U.S. and abroad. Uncertainty over the power of central banks to stimulate sluggish economies.
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At the December meeting, citing a strengthening U.S. labor market that would, in the FOMC's view, push wages higher and ultimately lift inflation toward the Fed’s 2% target, the committee voted unanimously to raise rates by 0.25 percentage point. Not much really, but hugely symbolic in that it represented a significant shift away from the Fed’s long-running stimulus programs initiated in the wake of the 2008 financial crisis.
Equally important, perhaps, was the Fed’s median forecast that interest rates would rise to 1.4% in 2016, which would require four more hikes in 2016. But that could only happen if economic conditions continued to strengthen across the board and inflation moved higher toward the Fed’s target, a likelihood strongly implied by Fed policy makers.
Following the release of the January minutes, though, in which central bankers conceded that global markets had tightened since the Fed first raised rates in December, analysts made clear their belief that the Fed, whether they acknowledge it or not, will scale back its plans for ‘normalizing’ U.S. monetary policy.
Now analysts, investors and even FOMC members seem to be declaring a collective “whoa” to those December-laid plans.
“This is as close as the FOMC will ever come to saying ‘oops’. Economic and financial conditions turned against their view almost immediately after their December rate hike and these minutes confirm that they are now on the sidelines until economic conditions improve and financial conditions ease,” David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management, said following the release of the FOMC minutes Wednesday.
Meanwhile, in testimony last week before Congress, Fed Chair Janet Yellen conceded that global markets have tightened since December, and New York Fed President William Dudley echoed those sentiments in a press conference on Friday.
Analysts at Wells Fargo’s Investment Institute have cut their 2016 rate hike forecast from two to just one.
“Clearly, given the reduction in our fed funds rate target, we believe that the probability for four Fed rate hikes this year is extremely low,” the analysts wrote in a note to clients. “In our opinion, the Fed’s recent rate forecasts show the Fed is far behind the curve on their recognition of current challenges facing the market.”
And analysts at Bank of America (BAC) are suggesting the next rate move could be lower rather than higher. “With disappointing data and an ongoing selloff in capital markets, there is a rising risk that the Fed will have to reverse course and ease monetary policy,” the BofA analysts wrote.
But the more likely scenario, according to the BofA analysts, is that the Fed will raise rates even more gradually than they’ve been projecting for months. So instead of the three rate hikes BofA initially forecast, the Fed will settle for two increases, one at its June meeting and another at its December meeting. “In other words, ‘gradual’ now means two rather than three or four hikes this year, we believe,” the BofA analysts wrote.
Analysts at Oxford Economics also believe the Fed will lift rates twice more this year, but that the next hike won’t occur until September.