FORECAST FOR CLEAR SKIES: LEI SHOWS LOW ODDS OF RECESSION

By John Canally, CFA Chief Economic Strategist, LPL Financial

Weekly Economic Commentary, March 23, 2015

Without question, the key event for financial markets last week (March 16 – 20, 2015) was the Federal Reserve’s (Fed) decision to remove the word “patient” from its policy statement, putting market participants on watch for a rate hike later this year. But, as always, the devil is in the details. While the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), signaled last week that it is ready to raise rates when members are “reasonably confident” that inflation will move back toward its 2.0% target, FOMC members substantially lowered their forecast for the level of the fed funds rate over the next several years. In addition, the FOMC lowered its forecast for gross domestic product (GDP) growth and inflation over the next few years. On balance, the outcome of the meeting confirmed our long-held view that the Fed would keep rates “lower for longer.” Fed Chair Janet Yellen’s post-FOMC meeting press conference confirmed the “lower for longer” theme, reminding viewers around the world that although the FOMC removed “patient,” it did not mean that the FOMC was going to raise rates at the next FOMC meeting in April. Yellen also stressed that a rate hike was not a sure thing and remained “data dependent,” i.e., they would need to see the labor market continuing to improve, inflation stabilizing, and inflation expectations moving higher for the period ahead.

We will continue to watch what the Fed is monitoring (the labor market, inflation, and inflation expectations) and will provide updates on the progress of these key metrics as needed. We provided an in-depth look at what the Fed is watching on the inflation side in last week’s (March 16, 2015) Weekly Economic Commentary, “FOMC Preview: When, How Often, and How Much.” The minutes of last week’s FOMC meeting will be released in mid-April and the next FOMC meeting is April 28 – 29, 2015.

LOOKING AHEAD WITH THE LEI

A report that may have been overlooked by financial market participants last week was the Conference Board’s monthly Leading Economic… Read the Full Report here: Economic Commentary 03232015