The US Federal Reserve has just lost ‘patience’, dropping this key word along with others from its latest statement on Wednesday. While a rate hike is highly unlikely in April, a number of analysts have read between the lines to forecast an increase in either June or September. The Fed offered little data themselves, instead saying rates were not likely to change until there was further improvements in the job market and renewed confidence of inflation returning to the 2 percent level.
The US dollar dropped sharply against all major currencies in reaction to the news, with the Euro enjoying its largest 1-day move against the dollar since December 2008. Despite the lack of clear language regarding the timing of interest rate hikes, traders around the world reacted strongly to the statement due to the omission of certain word and altered tone of the statement.
Since the December 2014 release, the Fed has said they “can be patient in beginning to normalize” monetary policy. The language around interest rates has now changed, however, with a less patient tone perhaps signalling a rate hike later in the year. In another change, the report said “economic growth has been moderated somewhat” instead of “economic activity has been expanding”.
From the report:
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 per cent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realised and expected–toward its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.”
Analysts are undecided between a June or September rate rise, with a recent Bloomberg survey suggesting most are expecting a rise in September. Fed chair Janet Yellen offered a somewhat cryptic clue of her own, saying that “just because we removed the word ‘patient’ doesn’t mean we’re going to be impatient.”
The FOMC statement was more dovish than most people expected, leading to huge moves in currency markets around the world. According to Steve Englander, global head of G10 FX strategy at Citigroup, the Fed’s statement was likely a deliberate move to slow down the dollar’s rapid rise in recent weeks rather than a reflection of future interest rate decisions. “Had they sounded hawkish, there would be nothing to stop the dollar from rallying for the next three months, and I think that was probably a consideration.” said Englander.