Is the Fed About to Hike Interest Rates?

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WASHINGTON, DC - FEBRUARY 24:  Federal Reserve Board Chair Janet Yellen testifies during a hearing before the Senate Banking, Housing and Urban Affairs Committee February 24, 2015 on Capitol Hill in Washington, DC.  Yellen gave the Federal Reserve semiannual monetary policy report to the Congress.  (Photo by Alex Wong/Getty Images)
What's your next move, Janet Yellen? Photo: Alex Wong/Getty Images

The Federal Reserve is getting ready to raise interest rates for the first time since 2006. That’s the takeaway that you’ll get from a lot of stories about the Fed statement today, in which the country’s central bankers dropped their pledge to be “patient” when considering rate hikes. 

The Drudge banner, for instance, currently reads “NO MOREPATIENCE.’” Bloomberg’s headline says the bank is “Opening Door to June Rate Increase,” given that the Fed statement explicitly says that an “increase in the target range for the federal funds rate remains unlikely” at its April meeting. The New York Times went with, “Fed Signals It May Increase Interest Rates by Midyear.” 

And perhaps it will. But getting into the guts of the report, my guess is that the Fed might be patient for a little longer than that.  

That’s because the Fed has revised down its projections for growth in the coming years, and its projections of core inflation for 2015 and 2016. When the Federal Open Market Committee met in December, it expected that the interest rate come 2016 would be about 2.5 percent; now the projection is for less than 2 percent. Just a few months ago, it thought the federal funds rate would be at 1.125 percent at the end of the year; now it thinks it will be at just 0.625 percent. 

It makes some sense: Yes, the economy is growing more robustly, and yes, the unemployment rate is coming down. But there are still absolutely no signs of the economy overheating, or even hitting a truly high gear. Inflation remains well below the Fed’s own target. 

So the Fed might have dropped the word patient. But their own projections indicate they’re in no hurry to raise rates. And that explains why the markets are soaring even as the headlines are floating the imminent possibility of hikes.