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A Certain Uncertainty: Fed Wary of Economic Outlook, Future Rate Hikes

FedThe Federal Reserve has consistently been obscure in the details surrounding its monetary policy decisions, and the Federal Open Market Committee (FOMC) was abundantly clear on just how unsure they are about the future in regards to their recent decision to leave rates at their current level.

The minutes from the FOMC's January meeting said, "Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook."

Meanwhile, most participants at the meeting "indicated that it was difficult to judge at this point whether the outlook for inflation and economic growth had changed materially, but they thought that uncertainty surrounding the outlook had increased as a result of recent financial and economic developments."

Policymakers appear to be struggling with their previous declaration to raise rates gradually four times this year due to turbulent financial markets and a bleak economic outlook so far this year. Committee members “generally agreed” that the risks cannot be determined at this point, but they also observed that "if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks,” the minutes said.

As far as rate increases are concerned, the Fed intends to hold out on any rash decisions to see whether the economy will improve or slip into a state of turmoil.

"While participants continued to expect that gradual adjustments in the stance of monetary policy would be appropriate, they emphasized that the timing and pace of adjustments will depend on future economic and financial market developments and their implications for the medium-term economic outlook," the FOMC minutes showed.

Paul Ashworth, Chief U.S. Economist at Capital Economics said in response to the Fed's minutes, "Despite the increased uncertainty, officials seemed content to wait and see whether the tightening of financial conditions was sustained and, if so, whether it would negatively impact on GDP growth."

He continued, "The chances of a March rate hike are still very slim, particularly in light of the most recent comments from Fed officials, but we think the Fed will resume hiking interest rates later this year. By the middle of this year, fears of a collapse in both China and the U.S. should have faded and rising domestic price pressures will be even harder to ignore. We expect the fed funds rate to end this year at between 1.00 percent and 1.25 percent.

National Association of Federal Credit Unions Chief Economist Curt Long noted that the committee is not "jumping to any conclusions" regarding volatile financial markets.

“Moreover, there is some acknowledgement of the divergence between financial markets and economic data, which has been relatively solid. However, there is some sentiment among the dovish elements of the committee that tangible evidence of inflation is a prerequisite for future rate hikes," Long stated. "That added to the uncertainty resulting from weakness in emerging markets, a strong dollar, and turbulent equity markets underlies NAFCU’s belief that the FOMC will revise down its forecast of four rate hikes in 2016 at its March meeting.”

Click here to view the FOMC minutes.

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