On Wednesday the Fed said it is not going to raise its key interest rate as expected. They also cut forecasted U.S. economic growth and inflation, and significantly lowered its estimate for the number of rate hikes in 2016.
The Fed’s committee, led by Chair Janet Yellen, estimated back in December that the economy would grow 2.4% this year and that it would raise rates four times.
Then stock markets became volatile, oil prices fell and fears of a U.S. recession magnified in January and early February and now the Fed is dialing back.
Yellen and other Fed leaders are only calling for something around two rate hikes this year and not four as previously stated. The Fed also dimmed its economic growth outlook for the year to 2.2%, compared with 2.4% previously.
Why so many cuts? Those cuts reflect concerns about how much the slowdown is impacting American growth.
Yellen also said that the rate could be reduced to zero in the event of any shock to the financial system. So it is clear that the Fed would rather see gradual steps and not a zoom to the top.
U.S. markets reacted positively to Yellen’s assessment and the Dow rose 125 points as she spoke.
Another key figure is that Unemployment fell in January to 4.9% and inflation has shown signs of life recently after being largely dormant in recent years. The Fed’s committee noted the job market’s continued improvement, but noted also that inflation remains well below the central bank’s target of 2%.
Inflation had recently inched up to 1.3%.
The Fed’s committee does not appear confident that inflation is gaining enough momentum. It cut its forecast for inflation this year to 1.2% from 1.6%.
Since mid-December, Wall Street has bet there would only be two rate hikes in 2016, and at one point despite being in the midst of market turmoil, investors were calling for no rate hikes. The Fed’s plans now appear to be lining up with investors’ expectations.