Nothing is expected from the Fed in March

The Fed hasn’t changed its monetary policy stance. It’s main interest rate remains between 0.25% and 0.5%. The US central bank is still considering that its monetary strategy is accommodative.
What is important now is the follow up of the December Fed’s decision to hike its interest rate. It was expected that it will not change its rates at the January meeting, the question was for March. A press conference is scheduled and could give to the Fed the opportunity of an announcement.
What type of signals the Fed could give to investors was the unknown of the January press release. After the December meeting the majority of investors expected 4 rates hike in 2016. Since this meeting the market volatility has dramatically increased, the oil price dropped deeply and the global economic environment is perceived as following a lower momentum. Expectations have changed at investors’ level and expectations on what the Fed could say in the press release has also changed.
The US central bank said that it was more worried on the US growth dynamics than on the labour market which continue to improve reducing pockets of inefficiencies in it. Households consumption and companies’ investment were following a more moderate pace than in December.
At the same time, the Fed’s perception of inflation has been deeply modified. In December the Fed was “reasonably confident” on the inflation convergence to 2% in a finite time. This term “reasonably confident” was not in the January press release. The other term that was not in the release was that risks were balanced. This means that there is a risk of divergence on the growth or/and on the inflation trajectories. It means that the US economy follows an unbalanced profile and this is new. The US central bank said it will be focused by the global economic momentum. The US profile is now very dependent on the rest of the world. This point, related to the world, that wasn’t seen in the past in this type of communication. The Fed points to the possibility that the US economy could be hurt by shocks coming from outside. The US growth path is not strong enough and could destabilized by the rest of the world.

There are two ways to read the Fed’s information in the press release
The first is to consider that the current turbulence are temporary and transitory. As a consequence, growth and inflation profiles will converge to a well behaved business cycle. In that case, the Fed must increase its interest rates in March without any ambiguity.
The second way to read the Fed’s release is to question the current US growth profile. The current momentum is low. For the fourth quarter of 2015, the Fed of Atlanta nowcast was just 0.7%. Some economists expect a negative figure. Activity in the industrial sector was weaker during the last 3 months of last year.
Therefore the question is always the same: If there are no tensions in the economy, in prices and in wages (+2.5% wage growth in December is not strong enough to characterize tensions), why the Fed should converge to a higher rate target? The risk for the monetary policy is asymmetric. It’s easier and the cost is lower to react after a positive shock that is able to create tensions than after a negative shock that weigh on economic activity and employment. The Fed said that the risk on activity has not disappeared. It was back through the world risky profile and the inability for the US to isolate from it.

This second reading is mine. The economy doesn’t converge to a high and stable trajectory. The crisis and the low growth momentum in recent years have had a persistent effect on the economy, limiting its ability to converge to a balanced business cycle with high employment.
The risk remains asymmetric and the environment is still to uncertain. The US economy is not out of the low dynamics coming from the crisis. The Fed mustn’t act to rapidly to be able to react in the case of a negative shock coming from outside or from inside as internal dynamics has been low recently. The Fed must let all the options opened to remain agile is this complex situation. In March the Fed will not move its rate.

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