Prior Week Summary
As was widely expected, the FOMC left the target range for fed funds unchanged at 0.25% to 0.5% after the March meeting, while guiding the market lower by reducing its projections for the pace of future hikes. The committee noted that global economic and financial developments continue to pose risks for the forecast and that inflation is expected to remain low in the near term, in part because of earlier declines in energy and import prices. Further, the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and that the rate is likely to remain below levels that are expected to prevail in the longer run.
The FOMC also released their updated Summary of Economic Projections, providing the first updated forecast since the December meeting. The report detailed that the median expectation of the Federal Reserve for the Fed Funds rate by the end of the year fell to 0.9% in March from 1.4% in the December projection, suggesting that Fed officials now only expect 2 rate hikes in 2016 rather than the 4 that had been previously forecast. At the same time, the Fed downgraded their median expectation for year-end 2017 to 1.9% from 2.4%. The revisions to the projected path of interest rates were hard to square with the relatively unchanged projections for PCE inflation, suggesting that the Fed expects that the additional accommodation that the extended period of low rates provides will set the stage for higher inflation down the road. What is undeniably true, however, is the average expectation of market participants, as estimated by the Overnight Indexed Swap market, continues to be meaningfully below the Fed’s projections as shown in the table on the right.
The Look Forward
Relatively active data calendar this week going into quarter-end, leading off with updated information on the housing market and manufacturing activity.