he Fed will remain "patient" in determining when to raise interest rates this year. The Fed's policy statement says: "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy...the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation."
Financial Times Alphaville reporter, Cardiff Garcia thinks the Fed will stay on message. “The Fed hasn’t indicated that they’ve changed its mind at all. The majority probability is that they still hike rates at some point this year”
Garcia thinks the Fed is in no rush to increase the rate. “Remember going into the fourth quarter last year it was expected that they would hike rates in the middle of this year. Now I think there is a strong chance they push this back until the second half of this year.”
Garcia says he’ll focus on what the Fed says about inflation and the global economy. “I’m going to be looking for any indications that they have changed its outlook on inflation and inflation expectations. Those have both come down. And maybe even reflecting some weakness abroad and whether we are going to import that disinflationary pressure.”
The rapid decline in oil prices is also something Garcia wants to hear the Fed’s take on. “We have to wait to see just how transitory the pass through effect from oil decline is. We have to see if underlying inflationary pressure will start to emerge later in the year.”
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The Fed will also be looking at yesterday’s much weaker than expected durable goods report. The Commerce Department said new orders for manufactured goods, which are expected to last three years, declined by 3.4%. The report along with lackluster earnings from Caterpillar (CAT) and Microsoft (MSFT) saw the markets suffer their biggest decline in three weeks. “The worry now is we’re not quite at the point we thought we were heading into the fourth quarter last year,” says Garcia.
We’ll also get a look at fourth-quarter GDP growth when the government releases data on Friday. Economists have steadily lowered expectations on the report. Garcia thinks GDP will be in the 3-3.5% range. He says low oil prices and the volatility they have caused will play a role in the country’s growth. “The drop in oil prices is going to be overwhelmingly good for the economy. On the other hand, the immediate impact is one of volatility. It takes a little while for those sectorial shifts to happen. There might be weaker investment in energy and energy related sectors.”