Wednesday, at the conclusion of the March 15/16 quarterly meeting to discuss federal funds interest rate increases officials decided to delay the second rate increase. Most analysts predict two interest rate increases in 2016 rather than the optimistic four increases tentatively scheduled in December 2015. Key concerns were continued inflation below 2 % and job growth. The FED officials project that inflation will reach 1.9% by 2017 and 2% by the 2018-year end (WSJ).
Consumer prices fell in February, largely attributed to the price of oil. While prices have risen, U.S. crude rose to $40 on Thursday from a $26 low in February. Many companies and nations are resisting making significant cuts to oil production because of the loss of revenue and aggregate fiscal impact. OPEC leaders are meeting in Doha, Qatar on April 17th to negotiate international oil production reduction agreements; key countries are Iran and Russia (CNBC).
Rather than the FED having a pessimistic outlook on the economy, it seems that they are moving forward with caution. The most significant factor in slowing and resistance is the global economy. As the interest rate increases the dollar strengthened which slows trade. In addition, the decreasing oil prices continued to slow the global economy. Much of Europe and Asia are implementing significant expansionary policy and stimulus; negative interest rates and aggressive bond buying.
Our economy is not stable at zero interest rates; true growth cannot be measured until the FED is no longer assisting the economy. Officials are not really implementing contractionary policy but tapering expansionary policy. It is necessary to implement changes slowly because our economy does not exist in a bubble.
International trade has significant impact on the U.S. economy. The FED is acting responsibly; they are still confident in another interest rate increase this year but are relying on quantitative numbers rather than effecting expectations. The most significant negative impact could be on expectations. The interest rate increase resulted in positive consumer expectations in the following months; the negative impact was from the global energy market, the value of the dollar, and slowing job growth. Consumers and the FED want a full economic economy but it must be based on real growth and the new equilibrium price of oil as supply has changed significantly.
Analysts and economists are projecting a 50% chance of a June interest rate increase, and a 75% chance of a December interest rate increase (WSJ).The OPEC meeting in April will have significant impact on stabilizing oil prices and a new equilibrium price and occurs before both possible increases. It is important to remember that the countries under scrutiny are developing countries with economies far more dependent on one or two key industries than the U.S., they are highly concerned about pressure to reduce oil production because of the severe fiscal impact.
While energy markets and other commodities slowed international exchanges have seen continued growth. The U.S. exchanges have seen five weeks of exchange gains and European and Asian exchanges have seen increases in the last week (WSJ).