The rate for caution: what are the forecasts gave the fed

The US monetary authorities will pursue until the end of this year, a cautious policy, further raising the key rate will be at a slower pace, promised the head of the U.S. Federal reserve Janet Yellen, speaking Tuesday at the Economic club of new York.

“I believe it is appropriate for the continuation of a cautious adjustment of monetary policy by the Federal open market Committee (FOMC),” said Yellen. In mid-March the fed has kept the interest rate the Federal funds target in the range of 0.25–0.50% per annum. During the year the rate will be raised only twice, not four times, as was planned back in December, it was decided at the meeting of March 15-16.

The gradual increase of the rates

In the future, the target growth rate will be slow, but Yellen has stressed that this is not a binding plan, and the forecast for the U.S. regulator. At the fed believe that the current monetary policy consistent with the objectives of increasing inflation and increasing employment. The fed continues to expect further improvements in the labour market, moderate economic growth in the medium term and return inflation to the target of 2% within the next two to three years.

According to Yellen, from the beginning of 2016 the data of macroeconomic statistics of the USA has produced a mixed impression. On the one hand, YTD monthly average is created by 230 thousand jobs, the employed population has increased and consumer spending grew. On the other hand, production and exports were adversely affected by the slow pace of global economic growth and significant appreciation of the dollar against other currencies in 2014. And in the energy sector, low oil prices led to massive layoffs.

However, the labor market, Yellen is waiting for positive news. Over the past year, unemployment in the United States has been steadily falling, down February to November from 5.5 to 4.9%. This figure is within the strategy of the “normal level”, approved by the fed in mid-March: swing from 4.7 to 5.8% with a median value of 4.8%. Now, says the head of the fed, there are reasons for a further increase in employment.

Taking in December, the decision to raise rates, the fed suggested that the fall in oil prices and a cheapening of imports will cause inflation to stay low. But for now, Yellen acknowledges, these two factors lose their power, opening the way to a moderate increase in inflation. In February, the PCE index (the price index of personal spending) grew by 1% in February 2015, and less costs for food and energy was 1.7%. In the next two years the price growth may reach 2%, but only in the case of a stable dollar and stable energy prices.

These processes forced the fed to revise its forecasts for the growth of effective rates by the end of 2016 the Federal funds rate will only rise to 0.9% (in December 2015, it was expected that this figure will reach 1.4 per cent), and by the end of 2017 to 1.9%. The efforts of the regulator to control the money supply are intended to bring the effective rate in line with the target, under conditions when the effective rate is not growing, improvement rate target was not deemed appropriate.

Overall, the fed refused to make predictions on the future movement of the key rate because of the volatility targets: “for Example, nobody can predict how quickly will weaken the influence of external constraints on the economy,” she said. Although that “headwinds” subside, Yellen is sure: only after that we can go about raising rates.

Risks to the economy

Among the major external economic risks, Yellen called the slowdown of the Chinese economy. According to her, experts agree in opinion that in the coming years, the growth of the Chinese economy will slow down due to changes in the economic development model of China from investment to consumer and from exports to domestic consumption. It is not clear how smoothly this transition will take place and how to monitor the possible emergence of financial difficulties in its course. This uncertainty has increased the turbulence in global financial markets that have arisen due to a new collapse on the Chinese stock market earlier in the year.

Another risk is the low prices for raw materials, especially oil. As Yellen explains, for the United States as the largest importer of oil low prices will boost spending and economic activity for several years. But for countries whose economy depends on oil exports, falling prices could lead to sharp cuts in expenditures, and for energy companies to a significant reduction of income and increased reductions. Further decline in oil prices may lead to adverse consequences for the world economy as a whole, she said.

In addition to the external economic instability of major internal deterrent Yellen described the labor productivity in the United States, which since the beginning of the crisis grows weak (and in February 2016 even fell by 3% in annual terms).

According to her, in the long term growth of the U.S. economy will contribute to reducing the number of external constraints, such as the decline in business activity abroad, a stronger dollar and sluggish growth in the number of households has not kept pace with population growth and income. If the effect of these factors will gradually stop, a neutral fed funds rate will rise, and in this case, ceteris paribus, it would be appropriate gradually more or less increase the bet.

The reaction of the markets

According to Yellen, in March, the markets responded positively was adopted a month ago the fed decision to slow the pace of rate increases. As they reacted positively and in a neat speech by the head of the Federal reserve on Tuesday. Us stock markets started the day with a fall and gold and oil have gone up, and the dollar and the yield on us Treasury bonds down.

The Dow Jones rose by 0.31%, S&P 500 by 0.3%, NASDAQ Composite — on 1,05%. Gold immediately jumped 1.2%, to $1253,2 per Troy ounce by 20:20 GMT it was trading at a price of $1235,16 (+1.1 percent). Declining throughout the day to 3% quotes major benchmarks after Yellen’s speech rebounded somewhat, although it remained in the red zone: the may Brent crude futures were trading 20:20 GMT $39,4/bbl. (-2,16%), WTI — at $38,54/bbl. (-2,16%).

As MarketWatch notes, we should expect the oil market reaction to a comment by the fed that a further fall in oil prices could negatively affect the pace of recovery of the American economy. According to her, the cost of raw materials has reached “the level of financial fracture for some countries and energy companies”.

The yield of Treasury bonds with two-, five – and ten-year maturities decreased. The yield on five-year bonds, for example, fell to 1,335%, reaching the lowest level since December of last year, ten-year fixed fell off on Monday of 1.87% to 1,844%. The dollar lost on Yellen 0,54%, at 19:40 Moscow time Euro pair/the dollar traded at the level of 1,125. The dollar in the afternoon session of the Moscow exchange fell on the ruble.