The Federal Open Market Committee surprised the markets with its decision on September 18 not to taper its quantitative easing program, even by a token amount. The FOMC members cited the recent increases in mortgage and commercial lending rates, along with the potential for more economic disruption stemming from budget and debt ceiling clashes this fall, in explaining their thinking. While the latter fiscal issues seem transitory, the FOMC members nonetheless expect rates to rise – just very slowly. This will be mixed news for corporate treasurers.
This can be seen from the new projections for the year 2016. Previously, the FOMC had only projected through 2015. Most of the 17 members expect to tighten the fed funds rate in 2015; only three think it will be necessary beforehand and two think it can wait until 2016. Even so, the bulk of the members think it will remain around 2 percent; only three members think it will rise to more like 4 percent.
The FOMC provided itself with some flexibility by removing the previous language that tied its monetary tightening to improvement in the labor market. But it locked in the idea that QE was going away – it also removed any language indicating that bond purchases could be increased if conditions worsened. Now the statement indicates that the program can only be wound down.
Treasurers seeking some data points around which to plan their funding strategies over the next few years might not see all this as overwhelmingly helpful. But while the Fed warns that economic growth will be only slightly above average over the next few years, and inflation will be below its target, the general message that benchmark rates won’t be rising remains hopeful.