# Fed Policy: Still behind the Curve  Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2017-03-17 Category: BUSINESS Category URL: https://financedigest.com/category/business Meta Title: Fed Maintains Dovish Sentiment Despite Hiking Rates Meta Description: Despite rate hikes, Fed emphasises accommodative policy. US economy showing signs of growth and improvement. Markets react positively. URL: https://financedigest.com/fed-policy-still-behind-the-curvehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/businessman-and-businesswom-1-1736844073382-compressed.jpg) Even while hiking interest rates today, the Federal Reserve Board maintained its dovish sentiment. In recent weeks, Fed members began signaling that rate hikes would come sooner, raising expectations for a more hawkish Fed stance. Despite the rate increase, the Fed maintained its emphasis on the need for accommodative policy and gradual rate increases even as the US economy has essentially achieved the Fed’s key targets for GDP growth, inflation, and unemployment. In fact, since their [rate hike](https://www.financedigest.com/ecb-to-go-big-again-on-oct-27-with-75-bps-rate-hike-reuters-poll.html "ECB to go big again on Oct. 27 with 75 bps rate hike: Reuters poll") in December, US financial conditions have eased.  The short end of the curve still offers negative [real yields](https://www.financedigest.com/german-real-yields-fall-to-new-record-lows-on-stagflation-fears.html "German real yields fall to new record lows on stagflation fears") despite full employment, above trend growth, and rising inflation conditions. And the economic stimulus promised by the Trump administration has already started to take [effect through executive orders rolling back](https://www.financedigest.com/the-npwt-suction-pads-market-to-grow-on-an-effective-and-accessible-note-backed-by-innovation.html "The Npwt Suction Pads Market to grow on an effective and accessible note backed by innovation") regulations and supporting investment. Given these clear improvements and the upward trajectory of both the US and global economies, the Fed risks falling further behind, potentially requiring greater rate increases in the future that could destabilize the markets and [economic growth](https://www.financedigest.com/oil-prices-hold-firm-amid-hopes-for-economic-growth.html "Oil prices hold firm amid hopes for economic growth"). The [Fed raised rates 25 basis points](https://www.financedigest.com/fed-officials-still-leaning-to-75-basis-point-rate-hike-in-july.html "Fed officials still leaning to 75-basis-point rate hike in July") (bps), as they had clearly signaled. Markets were on balance surprised because many had come to [expect that the Fed would increase rates](https://www.financedigest.com/dollar-slips-before-expected-fed-rate-hike.html "Dollar slips before expected Fed rate hike") four times in either 2017 or 2018. Instead, they maintained their [forecast of three hikes each year](https://www.financedigest.com/frozen-foods-market-detailed-analysis-in-forecast-year.html "Frozen Foods Market Detailed Analysis In Forecast Year"). As a result, [bond markets](https://www.financedigest.com/britains-bond-market-turmoil.html "Britain’s bond market turmoil") rallied, with the 10-year Treasury falling by 10 basis points (bps), and the US Dollar falling by over 1%.  In her press conference, Chair Janet Yellen took pains to emphasize that the Federal Reserve would take a gradual approach to rate increases. **Strong GDP and Employment** While first [quarter GDP growth](https://www.financedigest.com/spain-q2-quarterly-gdp-growth-revised-to-1-5-from-1-1.html "Spain Q2 quarterly GDP growth revised to 1.5% from 1.1%") may reflect a seasonal decline from fourth-quarter GDP, combined with materially delayed seasonal tax refunds, forward-looking indicators suggest strong US GDP growth. Initial [jobless claims](https://www.financedigest.com/u-s-weekly-jobless-claims-fall-layoffs-lowest-in-more-than-21-years.html "U.S. weekly jobless claims fall; layoffs lowest in more than 21 years") remain at over 40-year lows.  Both ISM manufacturing and non-manufacturing indices are well into expansionary territory, with [strong new orders](https://www.financedigest.com/italys-leonardo-raises-fy-orders-guidance-after-strong-nine-months.html "Italy’s Leonardo raises FY orders guidance after strong nine months") and employment components.  Should employment continue to surprise to the upside, [wage inflation](https://www.financedigest.com/bank-of-england-calls-for-wage-restraint-to-keep-grip-on-inflation.html "Bank of England calls for wage restraint to keep grip on inflation") may begin to accelerate.  At 4.7%, the [unemployment rate](https://www.financedigest.com/u-s-job-growth-picks-up-in-june-unemployment-rate-rises-to-5-9.html "U.S. job growth picks up in June; unemployment rate rises to 5.9%") stands below estimated NAIRU (non-accelerating inflation rate of unemployment), which refers to a level of unemployment below which inflation rises. **Financial Conditions Have Eased Since Last Tightening** US and global financial conditions have eased recently, despite the [Fed’s December rate](https://www.financedigest.com/u-s-dollar-rallies-to-more-than-2-year-hike-on-steep-fed-rate-hike-outlook.html "U.S. dollar rallies to more than 2-year hike on steep Fed rate hike outlook") increase. While part of the Fed’s concerns in the past have centered on [global growth](https://www.financedigest.com/london-stocks-fall-1-on-weak-global-growth-outlook.html "London stocks fall 1% on weak global growth outlook"), now that global purchasing manager indices (PMIs) have turned positive, supported in part by easy financial conditions, this factor may not be significant to their decision-making process in 2017. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---