Comparing the US Federal Reserve’s views on US economy

The latest policy statement Wednesday indicated that the target of the Fed funds rate remains the same, at 0.25 to 0.50%, as expected.

Despite the potential for a smoother and slower path to higher rate levels shares fell as investors and traders responded to a perception of deeper concern about the worldwide outlook from the Fed board. But the less-than-optimistic tone the Fed struck in its latest statement left few clues as to what its next move would be.

That wasn’t the certitude that the stock market was looking for. But it signaled that a seven-year period of near-zero rates was ending and that, while borrowing costs would not be rising fast, they would be headed up.

Come January, this balanced risk view is replaced with the much more open-ended: the “Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook”.

Since the Fed raised rates december 16, stock markets have plunged, oil prices have skidded and China’s leaders have struggled to manage a slowdown in the world’s second-biggest economy.

Others say the market’s swoon is not the product of the small increase in the Fed’s benchmark rate. But no one is sure. After all, it is only six weeks since they raised rates for the first time in nearly a decade. “Reality has refused to cooperate”. Its committee, led by Chair Janet Yellen, estimated in December that it would raise interest rates about four times this year.

“The FOMC would be concerned if inflation were running persistently above or below” this 2% target, the new language said.

“I still think they are going to raise rates in March”, said Gus Faucher, a senior economist at PNC Bank.

“It was very noncommittal”, said Asha Bangalore, economist at Northern Trust.

Still, the changes the Fed made in describing economic conditions signaled that it might be prepared to slow its credit tightening until it sees more evidence that the markets and the economy are stabilizing.

“The Committee now expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen, ” it says.

While the Fed tempered its economic outlook Wednesday, it appeared to place more emphasis on a labor market that has continued to churn out well over 200,000 jobs a month.

The S&P 500 dropped 1.09 per cent on Wednesday. “Rather, the Fed’s apparently heightened concerns confirmed fears of a deteriorating global outlook, pushing investors to sell”.

The Fed’s decision was approved by a unanimous vote of 10-0. The country’s decelerating growth has shrunk global commodity prices and the emerging market countries that have supplied them to China. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. On the one hand, employment growth had firmed (continuing the downtrend in the unemployment rate) and domestic demand growth remained robust.

Trading on Thursday may also be impacted by the release of reports on weekly jobless claims, durable goods orders, and pending home sales.

West Texas Intermediate, the benchmark North American contract, rose 43 cents to $31.88 U.S. a barrel, and Brent, the main worldwide contract, was up 84 cents at $32.65. The strong dollar has also made imports cheaper and helped hold down inflation.

Private forecasts indicate the recovery likely slowed to an annualized growth rate of less than 2 percent, though some show it may not crack 1 percent.

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