Fed ups the focus on its June meeting
March 18, 2015
This was not your standard stay-the-course announcement from the Fed. While no policy changes were made as a result of the Federal Open Market Committee meeting that ended today -- indeed, the Fed all but promised there would be no changes at the next meeting either -- the Fed may have sharpened the focus on when it will finally raise interest rates.
Key wording changes put a target on June's meeting
Particularly when the Fed has had no policy changes to announce, statements following its meetings tend to have a certain sameness to them -- indeed, some of the language has been identical from one meeting to the next. However, this time there were some surprises.
Not only did the Fed announce that it was not raising interest rates at this meeting, but it took the unusual step of stating that a rate increase at the next meeting (which is in April) is unlikely as well. Normally, the Fed uses fuzzier language than that, shying away from committing to what it will or won't do at any particular future meeting. This is not because the Fed likes being coy. Rather, by shying away from specific commitments the Fed retains the greatest latitude to adapt policy to changing conditions.
In a sense, downplaying the possibility of a rate hike in April can be seen as an attempt to alleviate the usual market jitters that lead up to a Fed meeting. However, if the Fed took some pressure off of April's meeting, it put something of an investor target on the following meeting in June.
This is not simply because the Fed's commitment to current rate levels did not extend beyond the April meeting. Another significant wording change in today's statement involved the Fed's monitoring of inflation. One reason the Fed has given for keeping interest rates low is that inflation is running below its target rate of 2 percent. However, while reiterating this in today's statement, the Fed also explained that it might raise rates when it "is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
This suggests that the Fed might not wait for inflation to reach 2 percent, but might raise rates if it believes inflation is headed back in that direction. In particular, this puts added focus on oil prices, which have been a leading cause of the recent bout of deflation. It also puts further attention on the Fed's June meeting.
The waiting game
Don't expect to see an immediate impact on bank rates from today's Fed meeting, but since they are clearly entertaining the possibility of a rate hike as early as midyear, this could push savings account rates higher in the second half of this year.
The bad news for consumers is that mortgage rates might move higher even sooner. In fact, if the Fed is right about inflation firming up, mortgage lenders will probably not wait for the Fed to start raising their rates.