5 takeaways from Fed meet

Janet Yellen conceded that the fate of the US economy is now deeply intertwined with what happens in the rest of the world

Global markets have rejoiced Federal Reserve’s chairperson Janet Yellen’s inaction on the interest rate front. US markets closed the day near their 2016’s highest level. While the overall expectation in the market was that interest rates will remain untouched, what took the market by surprise were the forward looking statements and the cautious approach of the chairperson.

Here are 5 key takeaways from the Federal Reserve’s meeting which resulted in markets rallying:

Not only were the rates left untouched, Federal Reserve said that they would expect to raise their benchmark rate just twice this year, after an initial increase in December, down from the four they previously predicted. Many analysts had raised doubts in December itself that the Fed would not be able to increase rates four times in 2016. Some continue to doubt that even two rate hikes will be possible in the current given the headwinds that global economies are expected to face.

Chairperson Janet Yellen said that the central bank is juggling mixed economic signals: a strengthening job market but surprisingly weak wage growth. In her interaction with the press she said that other labour market indicator suggests that the economy had yet to fully absorb the surplus of workers. The share of part-time workers looking out for fulltime job remains high. Yellen said that she is surprised that there is no wage growth in the economy, suggesting the high supply levels. Unemployment rates will be one of the key factor on which the Fed will decide on increasing rates and wage growth is the first hint that supplies are drying up.

Fed expects the economy to expand 2.2 per cent in 2016—0.2 percentage point less than they projected in December. Slow growth overseas has hurt U.S. exports and may have been a factor in the reduced estimates. Lower growth estimate is another indication that interest rate hikes will take some more time.

For nearly a decade Fed is in pursuit of increasing inflation in the country. Recent pickup in inflation led some economists to believe that interest rate hikes will continue as envisaged in December 2015. However, Yellen said that she is wary about the sustainability of the uptick since it was mostly driven by volatile categories. Prices increased by 1.7 per cent over the last one year, which is closer to the two per cent mark expected by the central bank. Clothing segment has contributed to the spike in inflation, which the Fed believes is temporary in nature.

Many experts say that the real reason for not increasing interest rates is the impact it would have on financial markets. World economies continue to show weakness and central banks across the globe are resorting to negative interest rates. Yellen said that the slow growth I China was not a surprise but she was more concerned with weakness in Japan, Europe and the emerging markets. She also highlighted the effect of lower oil prices on global growth. Of more concern to the country was the impact oil prices were having on its neighbour and main trading partners -- Canada and Mexico. Yellen conceded that the fate of the US economy is now deeply intertwined with what happens in the rest of the world, which brings us back to the point that she would not like to rock the boat by increasing interest rates.