In a Nutshell:  “… the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

Decision: Fed funds rate target range remains at 2.25% to 2.50%.

After the January FOMC meeting, I noted that the Fed has decided that it no longer has to do anything, but I also thought it hadn’t declared victory.  Well, they got pretty close to it today.  The Committee made it clear there is not likely to be any rate hikes this year and maybe just one next year.  And, the dreaded balance sheet runoff, which investors believed was sapping the liquidity that bolstered the markets, will start to slow in May and end in September. 

While investors may cheer the interest rate and balance sheet messages, they should not overlook the economic forecast.  The Fed downgraded its outlook for growth this year to just 2.1% and believes it will be no more than 2% in the following two years. 

Of course, that is what most economists would call trend, which means the labor markets will remain tight and wage gains will likely continue accelerating.  Can equity values grow decently under those circumstances?  That is questionable, since productivity appears stuck at a low level, demand is hardly rising, while labor costs are on the rise.  That isn’t a recipe for strong earnings growth.

So, where do we go from here?  Mr. Powell continues to argue that the Fed will watch the data and be patient when it comes to interest rates changes.  But the forecast also indicates the Fed doesn’t think it is at “neutral” yet.  The possible increase next year, in the face of mediocre growth and limited inflation, says the members do want to raise rates at least a little.  How he pivots to that possibility in the face of 2% growth is anyone’s guess.

The takeaway is that short-term interest rates are going nowhere.  Inflation is not likely to accelerate sharply since demand is not expected to surge. Therefore, longer-term rates don’t look to rise significantly.  But watch out for wages.  Their rise may not cause inflation to jump, but could cause earnings growth to falter. 

(The next FOMC meeting is April 30-May 1, 2019.)