Reactions To The Fed's Decision Not To Increase Rates: Like A Child Trying To Ride A Bike?

The Federal Open Market Committee on Wednesday left interest rates at 0.5 percent. After trimming its growth outlook for 2016 and 2017, the Committee suggested it still has plans for two rate hikes this year, citing expectations of a recuperation in the U.S. jobs market.

Following the Fed’s decision, Benzinga contacted a few experts for comment.

Allianz’s chief economic adviser Mohamed El-Erian told Benzinga, “Responding to the disappointing jobs report, the Fed is signaling a more moderate path for future rate hikes, not only for the remainder of 2016 but also further out with the average projection for 2018 reduced from 3% to 2.4%.”

Brian Dolan, Head Market Strategist at DriveWealth, said, “The Fed has moved much closer to the markets' thinking about the path of future interest rates increases, but there still seems to be a disconnect between the Fed expecting to hike twice this year and the market still expecting nothing further.”

“The downgrade to GDP forecasts for 2016 was to be expected after the soft 1Q, but a similar downgrade to 2017 suggests the Fed sees longer-term headwinds and a much lower level of future growth. A steady Fed would normally support risk sentiment, but slower growth expectations limit upside potential. I think we're more likely to see profit-taking rather than new highs in the immediate future,” he added.

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Tara Sinclair, chief economist for job site Indeed, said, "We’ve now had an effective Federal Funds rate below 0.5% since the end of 2008, and we would need to climb 5 percentage points to get back to the average effective Federal Funds rate we had over the previous 50 years,” she stated.

Sinclair went on to explain that, “The Fed’s plans to do a slow and measured climb back upward this year has been thwarted by mixed messages from the employment data, which has seesawed, and GDP growth, which has been consistently moribund. It’s a bit like watching a child learn to ride a bike: just when it looks like you can let go of the handlebars, she starts to teeter toward the pavement.”

“At the moment the low interest rate environment will remain and likely be a positive for markets, but also ultimately costly to savers, and is creating little in the way of incentives for people to build nest eggs. That could in turn be setting people up for further risks in the future. Of course, a rate hike itself would take a toll on the economy more broadly by making borrowing costs higher. So for now, the Fed will keep up the support at least through this summer with hopes the economy can gain its balance,” the economist ended.

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Posted In: Analyst ColorNewsEcon #sEconomicsFederal ReserveExclusivesAllianzBrian DolanDriveWealthFederal Open Market CommitteeFederal ReserveFOMCIndeedMohamed El-ErianTara Sinclair
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