Dovish Fed Sends Equities Higher

The Federal Reserve Open Market Committee (FOMC) decided to leave interest rates unchanged at 0.25-0.50% after a two day meeting. Citing "global economic and financial developments" as the main impediment to further rate increases, they noted that inflation expectations remained low thanks in part to the decline in energy prices. The outlook for the U.S. economy was lowered by twenty basis points, from 2.3-2.5% to 2.1-2.3%, with inflation reduced moderately from 1.5-1.7% to 1.4-1.7%.

A more interesting picture emerges when we look at the so called "dot plot", wherein the 17 members of the FOMC anonymously submit their expectations for the level of interest rates at yearend 2016, 2017, 2018, and beyond. The dot plot from the Fed's December 2015 meeting suggested a median expectation of yearend interest rates being in the 1.25-1.5% range for 2016. From the December rate level of 0.25-.050%, that suggested that there would be four rate hikes in 2016 (rate changes are usually done in 25 basis point increments). This expectation would have meant rate increases at half of the FOMC meetings this year - four hikes distributed among eight meetings.

The March dot plot showed a median consensus for 2016 of 0.75-1.0%, implying only two rate increases this year, with six additional committee meetings scheduled to take place (the FOMC met in January, and decided to leave rates unchanged at that point in time already). The median expectation for 2017 has been lowered as well, from 2.25-2.50% to 1.75-2.0%. The graphic below (from Business Insider) summarizes the change in sentiment among FOMC members, with the December expectations appearing in green and the March expectations appearing in purple.

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News of the slower trajectory for rate increases this year sent the S&P 500 up, where it finished in positive territory for the year for the first time in 2016. The Dow Jones Industrial Average also finished in positive territory, while the dollar weakened and the yield on 10 year Treasury bonds fell to 1.89%.