Fed May Not Be 'Patient' but June Rate Hike Appears Unlikely
NEW YORK (TheStreet) -- The Federal Reservemay not be "patient" anymore, but investors can probably afford to be.
The central bank, as expected, dropped the word "patient" in describing when it might start raising interest rates. At the same time, the Fed signaled that under current economic conditions rates are unlikely to be increased in June -- and may not even go up until December.
"Just because we removed the word 'patient' from the statement doesn't mean we will be impatient," Fed Chair Janet Yellen at Wednesday's press conference.
The markets took her at her word. Stocks quickly erased all their losses and ended the day sharply higher.
Investors, however, will have to watch the Fed even more closely than before. That's because Yellen has said that any move on rates could happen two meetings after the word "patient" was dropped. So the clock has started ticking.
But in practical terms, Yellen's press conference and the economic projections of voting members of the Open Market Committee laid down a series of barriers the economy would have to cross before the Fed would be likely to raise rates.
Expectations for inflation and growth came down -- both pointing to a longer runway to a rate hike. Members' projections of how fast rates might climb now call for lower hikes -- with the most common projection pointing to a Fed Funds rate of 0.5% at the end of this year, up from zero to 0.25% now.
And Yellen, ever careful to point out that the Fed's decisions are "data dependent," spent a lot of time acknowledging that first-quarter data don't look very strong, and inflation that was already lower than the Fed's target is moving even lower.
The combination of all this means that a hike in June is now unlikely, said Moody's Analytics MCO chief economist Mark Zandi.
"My sense is that a necessary condition for them to raise rates is a definitive acceleration in wage growth, as this a clear sign the economy is approaching full employment," Zandi said in an e-mail. "This is especially true given below-target inflation and the surging value of the U.S. dollar. The FOMC probably won't have it what it needs to raise rates at the June meeting, they might by the September meeting, and they almost certainly will by the December meeting."
Futures markets appeared to be betting on an October rate hike late in the day, a month later than prices were forecasting before the meeting. Bond markets have consistently been more dovish than the economic projections from open-market committee members.
"This should give investors some solace that the coming adjustment to higher rates won't be as difficult," Zandi said.
The biggest news of the day was that the Fed cut its inflation forecasts, which takes pressure off the market, said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch.
"Their capitulation to the market on inflation was the message of the day," said Harris, who thinks a September hike is the likeliest outcome but thinks there's a 25% chance the Fed could wait until 2016. "They're saying they're in no rush because of low inflation.
The caveat is that the data-dependent Fed could change its mind as new data come in, especially on wages, said Joel Naroff, opresident of Naroff Economic Advisors. Naroff, whose forecasts for unemployment and wage growth have generally been above consensus, says the Fed could act quickly if the impact of new, higher state minimum wages and the recently announced $9-an-hour wage floor for associates at Wal-Mart Stores (WMT) - Get Report and raises for workers at TJX (TJX) - Get Report and other retailers push overall wages higher.
"I remain at June,'' Naroff said.
