While the Federal Reserve Board’s announcement of a further $10 billion reduction in the monthly pace of its asset purchases was expected (beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion a month versus $30 billion previously, and will add to its holdings of longer-term Treasuries at apace of $30 billion a month versus $35 billion previously) the somewhat disappointing outcome of yesterday’s meeting was the downgraded assessment of GDP growth for the next several years.
The Committee trimmed the upper bound of its “central tendency” forecasts for GDP growth by 0.2 percentage points for 2014 (from 2.8%-3.2% to 2.8%-3.0%), 2015 (from 3.0%-3.4% to 3.0%-3.2%) and 2016 (from 2.5%-3.2% to 2.5%-3.0%) even as the outlook for the unemployment rate improved. (The statement removed the tie between a 6 ½% unemployment rate and policy tightening via the Fed Funds rate.) With no change in its inflation outlook and a dissent by one Fed voter who feared the statement weakened the Fed’s credibility with regard to its 2% inflation target, it was surprising to see Fed participants increase their Fed Funds rate forecasts for 2015 and 2016.
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While there was a modest shift forward in the timing of the first rate hike, more aggressive rate increases are now seen versus December’s forecasts. In December 2013, 12 participants viewed the first rate hike as likely to occur in 2015 while three participants put the timing of the first hike at 2016; now, 13 participants see 2015 as the year the Fed first raises its benchmark rate and only two see the change as occurring in 2016. Even so, note that the median forecast for the Fed Funds rate at the end of 2015 is 25 bps higher than it was in December (1.00% versus 0.75% previously), and is 50 bps higher for the end of 2016 versus December 2013 (2.25% versus 1.75% previously.).