The Federal Reserve's policy statement knocked 1
percent off the value of the dollar on Wednesday without even directly
mentioning it. The statement and updated economic forecasts Fed officials
published after their meeting sent a clear message to markets: The greenback's
24 percent surge since the end of June has complicated the Fed's
plans to tighten by holding down already too-low inflation and clouding the
outlook for economic growth. Here's where investors read between the
lines.
1. Policy makers
expect to raise their benchmark interest rate more slowly than they had
previously thought
The median estimate now pegs the federal funds rate at 0.625
percent at the end of this year, down from the 1.125 percent median in
December. At the end of 2016, the median forecast sees the funds rate at
1.875 percent, down from 2.5 percent. And at the end of 2017, it's 3.125
percent instead of 3.625 percent.
2. The committee
mentioned exports for the first time since March 2009
In January, exports fell from a year earlier for the
first time since September 2009. That was information Fed officials didn't have
in their Jan. 27-28 gathering. In her press conference on Wednesday, Fed Chair
Janet Yellen said "probably the strong dollar is one reason for
that." A stronger U.S. currency makes American goods more expensive
for consumers overseas.
3. Officials cut
their projections for economic growth sizably, across multiple
years
One of the most striking aspects of the new set of forecasts
was that, unlike in December, Fed officials no longer see economic growth
reaching 3 percent — this year, next year, the year after that, or in
the long run. The "central tendency" of their 2015 GDP growth
forecast — which excludes the top and bottom three of the 17
committee members' forecasts — fell to a 2.3 to 2.7 percent range,
from 2.6 to 3 percent.
The dollar rally that began last year is only about halfway
through, according to analysts at Morgan Stanley. One reason to believe the
dollar will continue to rise? The Fed will soon begin tightening policy while
other central banks around the world ease or at least maintain interest
rates at very low levels.
4. The Fed now
expects lower inflation
Officials said core inflation — a
measure of underlying price trends that excludes food and energy — will
probably track at 1.3 to 1.4 percent this year, from their December
estimate of 1.5 to 1.8 percent. This is significant because the Fed said
in its statement it needs to be "reasonably confident" that inflation
will trend back up to its 2 percent target before raising interest
rates.
Now, the Fed doesn't see core inflation reaching its target
until 2017. In December, officials thought it more likely that the goal would
be achieved in 2016. A stronger dollar puts pressure on prices by reducing the
cost of goods imported from outside the United States.
All of this underscores how the dollar's ascent
— in anticipation of an increase in U.S. interest rates — has
made financial conditions tighter, even before the central bank has
actually raised interest rates. The Fed finally seems to be
acknowledging that.
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