Considering the much improved state of the economy, the Fed statement was very much on the dovish side. There was one modest upgrade to the economic outlook in the first paragraph with the addition of this sentence: "Measures of consumer and business sentiment have improved of late."
As for inflation, while it appears there was a modest boost to the inflation outlook by saying "inflation will rise to 2 percent over the medium term" the Fed also said that "market-based measures of inflation compensation remain low."
For many, that effectively took March off the table. Fed funds futures for March showed odds of a March rate hike falling to 22 percent from 29 percent before the statement.
Even if a rate hike was unlikely in March, I was a bit surprised they didn't at least raise the expectations a bit.
After all, the Fed has plenty of cover to finally reduce its accommodative policy...
- The fear of deflation has gone away;
- The improving global economy has greatly reduced fears of a recession, not just in the U.S. but even overseas as we have recently seen stronger manufacturing numbers recently for the UK, Japan and the euro zone
- Most importantly of all, we finally have serious fiscal stimulus on the table in the form of tax cuts and infrastructure spending. Remember, central banks have complained FOR YEARS that they couldn't do it alone, that governments needed to be more involved. Yet, we heard not a word about even the implications of fiscal stimulus.
Bottom line: the Fed has plenty of cover to raise rates. But they can't seem to shed their overly dovish tone, implying they want as much flexibility as they possibly could have.
We'll see if Janet Yellen can provide any more color at her Congressional testimony in two weeks' time.