We think that the Fed has successfully made the transition from its “forward guidance” towards data dependency. The last step was taken by removing the word “patient”. Our base case is now a first rate hike in September.

Real Estate could benefit from more dovish Fed stance


Federal Reserve removes “patient”…

The statement of the Fed contained mixed signals. The first thing that markets watched for was the removal of the word “patient”, as this would indicate that a first rate hike could take place two meetings from now, at the June meeting of the Federal Open Market Committee (FOMC). Indeed, as many had expected, the Fed dropped the wording that it “can be patient in beginning to normalize the stance of monetary policy”. Instead, the Fed suggested that a rate increase “remains unlikely at the April FOMC meeting”, but that “the change in forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range”.

…but does not seem to be in a hurry to hike rates

There were more notable changes, however. The text stated that – although “labour market conditions have improved further” – the FOMC wants to see “further improvement in the labour market” and that “economic growth has moderated somewhat” and “export growth has weakened”. The last passage likely referred to the strengthening of the dollar which is becoming more of an issue. As many other central banks are on an easing path, dollar strength is likely to be persistent.

The Fed also reduced its forecasts for growth and inflation. Another noticeable change was observed in the Fed’s “dot plot”, which shows the interest rate predictions of the individual Fed members. The median prediction for the Fed funds rate at the end of 2015 had been lowered to 0.625% (from 1.125% in December) and to 1.875% for the end of 2016 (from 2.5%).

Market is now pricing in an October rate hike

Markets concluded that, although the Fed has opened up its options from June onwards, the central bank was taking a more cautious view on the economy. The market is now pricing in a rate hike later in the year. According to the CME Group’s FedWatch calculator, which is derived from federal-fund futures, October is the first month in which the probability of a rate hike is over 50%. The current probability for a June hike is 9%, while there is a 46% likelihood of a September increase and a 67% likelihood of a rate hike in October, the data show.