The Fed's statement recognized a slowing of U.S. economic growth that encompasses inventory spending and exports. It also seemed less confident about the outlook for inflation rising to the target level. Furthermore, as an acknowledgment that this unwelcome domestic slowdown is principally driven by economic developments abroad and volatile global financial markets, Fed officials shied away from setting out their traditional assessments of the "balance of risks."
The central bank confirmed what markets had anticipated and priced into the short-term segments of the fixed-income markets: Not only would there be no immediate repeat of the December interest rate hike, but it will be difficult for the Fed to make good on the expectations of four hikes that it signaled for 2016. As a result, officials are being forced to revise — yet again — their communications; and there will be much complaining about their policy conviction and credibility.
All of this reflects a much deeper and unfortunate situation.
