Fed Reverts Back to Old Ways, No Rate Hike This Month

It appears the Federal Reserve is back to its regularly scheduled programming in terms of interest rates as many in the mortgage industry expected. As their first meeting of the year came to a close, the Federal Open Market Committee (FOMC) agreed to leave the federal funds rate at its current level due to economic worries.

"Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent," the FOMC minutes said. "The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."

As the U.S. struggles to combat drastically low oil prices, a volatile stock market, and inflation disappointments, coupled with a too-strong U.S. dollar, Fed officials practically had no choice but to leave rates unchanged. Given the rough start to 2016, some in the industry are beginning to question if the Fed will dial back on its December decision or ease up on the four "gradual increases" projected for this year.

"The renewed turmoil in global financial markets together with the downward revisions to estimates of fourth-quarter GDP growth in the U.S. have prompted claims that the Fed made a serious policy error in raising interest rates late last year," Capital Economics said. "With the risks of an extended downturn in the U.S. economy still modest, however, and domestic price pressures building, it would have been foolish of the Fed to ignore the cumulative improvement in labor market conditions for any longer."

The FOMC minutes released Wednesday afternoon showed that Fed officials are concerned about inflation still running below the target level of 2 percent. This hindrance is partially the fault of falling energy prices and prices of non-energy imports.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen," the minutes said. "Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further."

The Fed did not back off of their previous forecast for more rate hikes in 2016, but with the economy in a questionable state, the committee is just not certain when the rates will go up again.

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data," the Fed said.

Wells Fargo analysts agreed that "further deterioration in long-term inflation expectations could alter Fed officials’ views on the timing and magnitude of the rebound in inflation, thereby pushing back the timing of the committee’s next rate hike."

"With oil prices hitting fresh multi-year lows this month, inflation’s return to the Fed’s 2 percent target has been delayed yet again," Wells Fargo analysts said. "One linchpin in the Fed’s decision to begin raising the fed funds rate in December, despite still-soft inflation readings, has been the relative stability of survey-based long-term inflation expectations. Yet, the prolonged downdraft in oil is testing the Fed’s view of “transitory” effects on inflation as the highly visible decline in energy prices has seeped into views of long-term inflation."

Click here to read to full FOMC statement.