Fed Rate Hike Timing Delayed After Weak GDP and Deflation

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The Federal Reserve just blinked in Wall Street’s newest game — that is the game of Rate Hike Chicken! After having moved from being patient to including the possibility of a June or summer rate hike, the new Fed statement looks like the Fed has just become data-driven, meaning we are now on meeting by meeting bias on how far out it will really be before the interest rate hikes will come.

24/7 Wall St. would like to remind readers about one key issue — Do not think for a second that the Commerce Department’s first quarter GDP reading with a tiny 0.2% gain, followed by anemic inflation to outright deflation, did not play a role in Janet Yellen and the rest of the Fed backing off the timing of when Fed Fund rate hikes would come. Another clue — the vote was 10-0.

If you read through the statement, as we did, all you have to really consider is the very first paragraph. The Federal Reserve lost its will to tighten, and weaker and weaker economic data is the cause. The Fed said,

Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

In short — we just can’t wean you off the no-rate climate yet. Here is where the future timing of rate hikes just went out the window:

In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The labor market has been getting better, with improvements slowing of late. As far as when inflation will rise again, well let’s just say that the Fed has a very hard time targeting gasoline and oil demand and prices.

Janet Yellen is also maintaining the policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction — which is to help maintain accommodative financial conditions. Again, no tightening comment change.

Now for the severity of just how high those rate hikes will go —

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Interest rates might not be zero forever, but you could quite literally be in a low rate environment for years and years. Fed Funds Futures now show October as the first month with a 100% chance that Fed Funds will move up to a whole 0.25%. The same Fed Funds Futures do not show a 100% chance of a 1.00% Fed Funds Rate until December of 2016. That is only just a month after we find out who our next President of the United States will be.

That junk bond market bubble you keep hearing about from bond guys just might not be bursting yet. Ditto for the rest of the bubble that is the bond market.