A Hike, a Halt, or a Cut? FOMC March 2016 Meeting

This blog’s readers had been able to guess the outcome of the December 2015 FOMC meeting. January 27 meeting‘s rate decision (hold) came as no surprise to the markets. The next meeting is scheduled to conclude on March 16 and will be accompanied by the press conference of Janet Yellen and the release of Summary of Economic Projections, which are issued quarterly.
What we have now
January 27 Fed’s meeting could be called a dovish one. Especially if you compare it to the December 16 monetary policy statement. Almost every phrase that had been changed implies a lower likelihood for us to see another interest rate increase soon.
There were two important speeches by the prominent FOMC members after the January meeting. One of them was given by Vice Chairman Stanley Fischer. In his February 1 address to the Council on Foreign Relations in New York, he could not sound more dovish without explicitly stating that he will not vote for the rate increase in March:

And my colleagues and I anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and that the federal funds rate is likely to remain, for some time, below the levels that we expect to prevail in the longer run.

He also mentioned concerns about China as something that will prevent monetary policy tightening in the United States.
In her February 10 testimony to the Committee on Financial Services (U.S. House of Representatives), Fed’s Chair Janet Yellen was less dovish. Yet her presentation also suggested some interesting points that would likely mean a slower rate shift:

…market-based measures of inflation compensation have moved down to historically low levels; our analysis suggests that changes in risk and liquidity premiums over the past year and a half contributed significantly to these declines. Some survey measures of longer-run inflation expectations are also at the low end of their recent ranges; overall, however, they have been reasonably stable.

She also hinted that the unusually low interest rate level kept by the Fed since 2008 may be the new normal given the global long-term economic conditions:

This expectation is consistent with the view that the neutral nominal federal funds rate–defined as the value of the federal funds rate that would be neither expansionary nor contractionary if the economy was operating near potential–is currently low by historical standards and is likely to rise only gradually over time. The low level of the neutral federal funds rate may be partially attributable to a range of persistent economic headwinds–such as limited access to credit for some borrowers, weak growth abroad, and a significant appreciation of the dollar–that have weighed on aggregate demand.

Currently, CME’s 30 Day Federal Funds Futures price shows 95.9% probability of no change for the Fed funds rate on March 16. The data is rather stale — it is based on Friday February 12 close, but it gives a rough idea of the hike’s unlikeliness.
95.9% probability
Future
The minutes of the January meeting are to be released on February 17. They will provide some insights regarding the FOMC governors’ feeling towards the future of the interest rates. Unfortunately, the minutes will have little new to tell us because they are based on the information that was available to Fed back in January 27. Still, it will shed some light on Fed’s plans.
Update 2016-02-18: Yesterday’s minutes have shown that the Fed is aiming for a gradual tightening of the monetary policy and that the next hike decision will be very data-dependent. It means that, for now, traders should be focused on the macroeconomic indicators coming out of the United States rather than on some previously mentioned dates and projections.
An important factor assessed by the Fed is the price stability, namely its measure called core PCE index. One more core PCE inflation report is due on February 26. February 1 release was a mixed bag — 0% growth vs. 0.1% forecast in December, but November’s value was revised positively. High readings, if reported on February 26, would increase the probability of the Fed hiking the rate.
Update 2016-02-26: With core PCE inflation at 0.3% in January, the FOMC might be tempted to raise the rates in March after all. A monthly rate of 0.3% is equivalent of 3.66% annual price increase, which is well above the Fed’s target of 2%.
Employment statistics is of a primary importance for the US monetary policy makers. One more non-farm payrolls report will go out before the next FOMC’s meeting — on March 4. There was one NFP release since FOMC’s last meeting — a disappointing announcement released on February 5. It has shown a slower than expected growth for January with a negative revision of December’s data. Similarly poor outcome on next release will be detrimental to any hawkish mood left in FOMC.
Update 2016-03-04: Another positive surprise for the Fed hawks came from employment statistics — February’s NFPs turned out to be much higher than expected. January’s value was also positively revised. The only problem is that the average hourly earnings are not keeping up with the forecasted pace. Still, the whole macroeconomic situation looks to be much more favorable for another rate hike.
I, personally, do not believe that the Federal Reserve will be able to increase interest rates this time. They will have to wait for a better opportunity — perhaps, on its June meeting. The markets seem to be agreeing with this opinion. And how about you?

What will FOMC decide on its March 2016 meeting?

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The poll will expire on March 16, at 18:00 GMT — one hour before the rate decision is announced.

If you have some idea of how the US Federal Open Market Committee will act during its next meeting and what it will be looking at to decide the future of the Federal funds rate, please tell us using the commentary form below.