U.S. Fed disappointed by wage growth

The biggest takeaway from the Federal Reserve’s meeting today was the reduction in how many times the Fed expects to raise rates in 2016.

So says Prab Sagoo, associate director at Nasdaq Advisory Services. “The indications now point to only two possible future rate hikes this year, which is half of what was projected in their December 2015 update, but what the market had been expecting.”

The reason for the Fed’s hold on rates and continued dovishness is weak global economic and financial markets. However, in the press conference following the Fed’s announcement, Federal Reserve Chair Janet Yellen has noted that while the Fed has slightly downgraded U.S. growth for this year to 2.2% from 2.4%, the labour market will continue to be a bright light.

Between now and 2018, for example, the Fed is calling for a drop in U.S. GDP from 2.2% this year to 2% in 2018. Meanwhile, the unemployment rate is expected to keep improving, dipping to 4.5% by 2018—to date, the U.S. unemployment rate has fallen to an eight-year low of 4.9%. In particular, Yellen says the labour force participation rate has improved.

That’s why she’s disappointed by wage growth. She notes, “The Fed had expected more wage pickup, given reports say firms are facing pressure. But that’s isolated to certain sectors.”

Sagoo says market reactions were:

• Treasury yields fell in both Canada and the U.S.
• The loonie rallied sharply versus the U.S. dollar, meaning investors may be pricing in a bottom for the loonie.
• Financials saw some selling off, as lower interest rates will further pressure interest margins. But, says Sagoo, buyers stepped in immediately to take advantage.
• Gold stocks rose and helped push the materials space, as some investors fear the statement is too dovish.
• Oil prices added to gains and this helped energy names as well as financials.

Meanwhile, most of the questions aimed at Yellen during her press conference were centered around the central bank’s expectations for inflation. She says, “Core inflation, which excludes energy and food prices, has firmed up. But will that continue? The FOMC expects inflation to hit the Fed’s target over the next two to three years.”

When asked whether the U.S. could be heading for an overshoot of inflation, Yellen noted, “We’re not trying to engineer an overshoot” to make up for current low levels. In fact, she says an overshoot of inflation “could call for more accommodation of policy and in a rapid fashion.”

Live tweets from Federal Reserve conference

Janet Yellen has arrived! Stay tuned for more on the #Fed’s stance. She says their outlook hasn’t changed much, despite strong U.S. data.

Yellen blames business investment weakness primarily on oil-price growth. Nonetheless, the #Fed expects the U.S. economy to improve.

The #Fed expects GDP to now be 2% by 2018, versus 2.2% as previously projected. #USeconomy

Stocks prices have fallen slightly since the Fed’s last meeting, while Treasury rates have risen, says Yellen #FederalReserve #economy

Proceeding cautiously at this time, adds Yellen, means the #FOMC can verify that employment strength will be sustainable over the long term.

The median projection for the U.S. federal funds rate has risen only gradually. By 2018, it will be closer to its normal level: #Yellen

But, adds Yellen, “Policy isn’t on planned course.” Predictions for inflation, employment and interest rates are based on FOMC members’ individual views.

#Yellen notes the U.S. economy will certainly surprise, and mentions the federal funds rate could dip as low as 0% if markets worsen.

Q: If the current conditions aren’t enough to raise rates, what’s needed? A: First, the #Fed hasn’t promised rate rises, says Yellen. Yes, there’s been a shift in FOMC members’ view on proper policy, but this is based on global issues and a tightening of credit spreads. Further, says #Yellen, what we’d need to see is continued U.S. growth as we’re seeing now, but rate rises will be gradual versus subsequent.

#Yellen hasn’t yet concluded that we’ve seen a lasting uptick in core inflation. But Committee will monitor inflation trends closely.

When asked about global growth worries, #Yellen mentions China, Japan, Mexico and the overall effect of oil prices. #FederalReserve

Q: If enough data from now until April, could rates rise? Answer from #Yellen: There’s a short period between now and that meeting, but it’s possible.

Q: If oil prices rose to $50, what impact would that have? Answer from #Yellen: It’s hard to determine effect on households. #Yellen adds families have saved an average of $1,000 per year, but that money can moved to other spending. But, if oil rose to $50, says Yellen, could speed up path to higher inflation. But #Fed tends to look through oil trends, and at good and bad effects.

Q: Why is wage growth disappointing? Answer from #Yellen: She had expected more wage pickup, given reports say firms facing pressure. But that’s isolated to certain sectors.

No reason #Fed’s policy can’t diverge from that of other global central banks, says Yellen. U.S. is stronger, so “natural to see divergence.”

Plus, political views don’t have sway on #Fed decisions: #Yellen. Individuals who are members of FOMC may act politically outside of meetings, but #Fed’s non-partisan.

Q: Do vacancies on #FederalReserve board have impact? #Yellen says #FOMC is doing good job, but would welcome members to operate optimally.

Q: Are negative rates as effective as QE? Answer from #Yellen: The #Fed is not considering negative rates. But, watching global experience. Here in U.S., we have range of tools, and would consider lower rates if needed. But negative rates have good and bad effects.