Market Commentaries

The Federal Reserve brought its latest two-day FOMC meeting to a close earlier this afternoon and, as expected, dropped the word “patient” in assessing just when it would begin increasing short-term interest rates, namely the federal funds rate.

Specifically, the central bank, in voting to keep interest rates at near zero for the time being, suggested that economic growth had moderated somewhat since its January meeting. To be sure, the Fed acknowledged that labor market conditions had improved further, which was evident in February's strong job creation figures. Also, household spending was up moderately, while declines in energy prices had boosted household purchasing power. On the other hand, the recovery in housing remained slow and uneven and export growth had weakened.

Importantly, the Federal Open Market Committee continued to see the risks to the outlook for economic activity and the labor market as being nearly balanced. Also, inflation is expected to remain near its recent lows for a time, but to eventually move toward the banks 2% target over the intermediate term as the labor market strengthens further.

Given all of this, the FOMC, or the Committee, felt that maintaining the current minuscule level of borrowing costs was appropriate. In gauging how long it will keep to this rate approach, the Committee said that it would take into account a wide range of information, including labor market conditions, inflation, and international developments. The Fed would want to see additional job gains and some indication that inflation was headed back toward 2% before starting to raise rates.

This statement would imply that the first rate hike could well be pushed back to September or later, rather than at the pending June meeting, as some have suggested. Our take is that September would be the earliest date at which the Fed would act and that future rate hikes after that initial move would come slowly and perhaps irregularly. Note that the Fed's vote was unanimous.

All in all, this was a dovish statement, as we had expected, and one which immediately mollified skittish investors on Wall Street who put into effect their buy programs immediately, thereby erasing a formidable loss in the Dow Jones Industrial Average and pushing that index well into positive territory in a matter of minutes.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.