In our view, the March FOMC statement was more dovish than anticipated. The committee upgraded its assessment of economic activity, saying that activity has been expanding at a moderate pace, driven by moderate household spending, an improved housing sector, and a further strengthening in the labor market. The only weak spots were business fixed investment and exports, both of which were characterized as soft.
Finally, the committee described market-based measures of inflation expectations as remaining low. The surprise to us came in the second paragraph, where the committee said that, although it expects that economic activity will expand at a moderate pace and labor markets will continue to strengthen, “global economic and financial developments continue to pose risks.”
In our view, this suggests that the committee sees risks to the outlook as skewed to the downside, which is more dovish than our expectation, which was that the committee would see risks to the outlook as “nearly balanced.” The presence of downside risk to growth led to a reduction in the median end-2016 funds rate of 50bp, meaning the committee now anticipates only two hikes in 2016 instead of the four it assumed in December.
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