We hold to our Fed rate forecast

Genevieve Signoret & Patrick Signoret

After Wednesday’s U.S. Federal Open Market Committee (FOMC) decision to taper off asset purchases by another $10 billion and a tone taken by Chairman Janet Yellen in her press conference (transcript) that we read as dovish, we hold to our view that the Fed rate will rise to 0.50% in Q4 2015 and stay that low till at least March 2016.

Last Wednesday, the risk we pointed out last week for credit and emerging market foreign exchange markets did not materialize: Chairman Yellen did not try to talk credit risk spreads down with a stern warning to markets that a rate hike could come sooner than markets currently expect (mid 2015). By contrast, her tone remained dovish in our perception. She explained that neither recent higher inflation readings nor a constantly falling unemployment rate nor financial stability considerations were pushing her toward faster normalization. She did say that “diminished risk spreads” had caught her attention, but she added that she didn’t see the kinds of broad trends that would suggest that financial stability risks had “risen above a moderate level”.

FOMC member projections, meanwhile, varied little from last March. Twelve of 16 members think that a first rate hike will be appropriate in 2015. Their median monetary policy rate forecast for the close of 2015 is just over 1.00% and for 2016 around 2.50%.