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The two-day Federal Open Market Committee meeting wrapped up today (Wednesday) with the U.S. Federal Reserve revising down its previously more optimistic economic growth forecasts and reinforcing expectations that interest rates will climb faster than previously anticipated.
Just two days after the International Monetary Fund revised its 2014 growth estimates for the U.S. economy from 2.8% to 2%, FOMC members revised down their estimates from a range of 2.8 to 3% in March to 2.1% to 2.3% following this most recent FOMC meeting. The Fed maintained its more than 3% growth estimate for 2015.
This downward revision also came with further indication that interest rates will increase sooner than what many had expected.
There was also a more dramatic change in the "dot plot," which displayed FOMC participants' expectations for future interest rates and captivated observers following March's FOMC meeting. There was a very clear upward shift in the distribution of FOMC members' expectations for the 2015 target rate in this past meeting from the meeting in March.
FOMC members see the federal funds rate close to 1.25% by the end of 2015 – up from the Fed's 1% estimate for that time period in March. The dot plot shows rates nearing 2.5% in 2016, up from the previous target of 2.25%.
With the Fed's bond-buying program expected to wrap up by the end of the year, Fed Chairwoman Janet Yellen shook investors after the March FOMC meeting when she said interest rates could reasonably rise six months after the end of this round of easing. This would shift the timeframe for an increase in the near-zero Fed funds rate to the first half of 2015, whereas many expected the hike to happen in the second half.
The expectations for longer-run interest rates came down, with more of the distribution centered on 3.75%, down from 4% after March's FOMC meeting. Yellen attributed this change to a change of members within the FOMC, which has seen two additions and two departures since the last release.
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As expected, the Fed announced a further reduction in its bond-buying program from $45 billion a month in agency mortgage securities and longer-term Treasurys to $35 billion a month. The asset purchases were a part of a third round of quantitative easing that began in September 2012 as an $85-billion-a-month plan, which the Fed has since been reducing by $10 billion in every FOMC meeting since December. At that pace, tapering should end by December 2014.
Yellen said in the press conference that the Fed will maintain its goal of full employment and 2% inflation, but in deciding whether to raise the Fed funds rate from its current 0% to 0.25% target, the Fed "will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments."
She added that a rise in rates will happen a "considerable" time after bond buying ends.
The lowered growth forecasts are in line with those of Money Morning's Chief Investment Strategist Keith Fitz-Gerald, who has been skeptical that stimulus policies would help the United States come close to the elusive 3% growth figure.
"As I said years ago, the U.S. would be lucky to do 3% even with trillions of dollars in stimulus, noting all the things that the IMF has apparently just figured out – a loss of economic momentum, a sluggish housing market, and a stubborn jobs market," Fitz-Gerald said Monday.
Fitz-Gerald said he sees this downward revision providing fodder for a more dovish policy on interest rates later in the year.
"I've got to believe that Yellen will make a statement or statements in the next few months now that she has a growing body of supposedly 'independent' research to fall back on in addition to her own team's half-baked economic data," Fitz-Gerald said.
The markets responded to today's FOMC meeting with a rally, as the S&P 500 surged ahead 15 points and closed at a record high 1,956.98, while the Dow Jones Industrial Average advanced 98.13 points to 16,906.62. The Nasdaq also moved ahead 25.6 points, closing at 4362.84.
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