Markets Surge as Federal Reserve Loses “Patience”

Equities rallied in the United States as the Federal Reserve hinted that interest rates will not rise in the near term, and that the Fed continues to wait until the labor market is stronger.

Equities rallied in the United States as the Federal Reserve hinted that interest rates will not rise in the near term, and that the Fed continues to wait until the labor market is stronger.

The Federal Open Market Committee announced in a statement that interest rates would rise “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.” Chair Janet Yellen adding that the Federal Reserve will look for “improvements in the labor market” and an increase in the rate of inflation in the United States before raising rates.

Chairwoman Yellen also noted that recent downward revisions to GDP growth caused the Fed to wait before raising interest rates. Looking at unemployment, economic output, and inflation, Janet Yellen noted that the economy remained too weak for an interest rate hike in April.

In a statement, Yellen said the Federal Reserve would continue to reinvest proceeds from securities, including mortgage-backed securities and U.S. Treasuries to continue to stimulate the economy.

Strong Dollar, Weak Exports

Yellen also noted that “it looks like … real GDP growth has declined somewhat from where it was in the last several quarters, and that’s really why the committee indicated that growth has moderated somewhat,” adding that the downgraded growth estimates is due to weakening export growth from the stronger U.S. dollar. With these trends, import prices are lower, keeping less risk of a wage-price spiral and the need to raise interest rates.

Despite the headwinds, Yellen noted the U.S. economy is stronger. “We continue to project above-trend growth, we continue to project improvement in the labor market,” she said, adding the U.S. economy has “considerable underlying strength”.

A Loss of Patience

With the FOMC release, the Federal Reserve has abandoned its use of the word “patience,” which many analysts believed would be an indication of a possible rate hike in June. However, Yellen’s statements made it clear that a decision to raise interest rates will be data dependent, and a hike in June is not necessarily going to happen.

Markets interpreted this as a more dovish stance from the Federal Reserve, meaning it is unlikely that the Fed will raise rates as early as June. Fears of a rate hike in the summer had been a headwind for U.S. equities in recent weeks, keeping the S&P 500 largely range-bound and flat for 2015.

Shortly after the release, stocks rose nearly 1% and yields on long-term U.S. Treasuries fell even as short-term Treasuries rose. Ten-year Treasuries fell to less than 2%, while 30-year Treasuries fell to 2.56%.