• Economic and financial conditions improve
    • Fed maintains its outlook of low inflation
    • In this environment, Fed funds are likely to remain low for a prolonged period
    As in previous statements, FOMC members consider that “economic activity is likely to remain weak for a time”. However, Fed continues to improve its assessment on the economic outlook and made three major changes to the economic activity paragraph in its latest statement. The first one indicates that “Financial market conditions have become more supportive of economic growth”. The second one highlights better prospects for employment as “deterioration in the labor market is abating”.

    In addition Fed replaced the reference that businesses are still cutting back on staffing with the view they remain reluctant to add to payrolls. This suggests that FOMC expects payroll to stabilize soon although not to necessarily increase. The third one reflects an improvement in income growth trends from “sluggish” to “modest”. These changes imply that the Fed has a more positive outlook for household spending.

    The FOMC assessment on inflation remained unchanged. It continues to signal that “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

    Fed maintained its perspective that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” In addition, the FOMC used the statement to remind the public of the previously scheduled expiration dates of different liquidity programs, indicating that financial market trends are in line with previous expectations.

    Bottom-line: Stronger financial conditions guarantee that Fed will implement its exit strategy as planned. Moreover, the improvement in the Fed’s economic outlook is in line with our baseline scenario of a gradual economic recovery and low inflation. Thus we maintain our expectation of low interest rates for several more quarters.