PPlease find attachment for the questions below.
1. If the federal reserve increased the rates unexpectedly, what would most likely happen on the stock market? Explain
2. If there weren't any forward-looking guidance or any other future rate projections, what would be the most likely impact of this lack of guidance on investment?
3/20/2016 Fed scales back forecasts for rate rises amid global risks FT.com Click here to try our new website you can come back at any time Last updated: March 16, 2016 6:19 pm Fed scales back forecasts for rate rises amid global risks Sam Fleming in Washington and Robin Wigglesworth in New York Share Author alerts Print Clip Gift Article Comments The Federal Reserve has scaled back its interest rate forecasts to two quarterpoint rises this year, coming closer into line with market expectations as it flagged up risks to the US outlook from global financial and economic developments. The Fed's more dovish outlook makes it less out of step with other central banks which are still intent on further monetary loosening to lift consistently low inflation and offset weaker global growth. Janet Yellen, the Fed chair, told a press conference that proceeding cautiously would \"allow us to verify the labour market is continuing to strengthen despite the risks from abroad.\" \"Such caution is appropriate given short term interest rates are still near zero, which means monetary policy has greater scope to respond to upside than downside changes in the outlook,\" she added. The US central bank kept its target range for the federal funds rate unchanged at 0.25 per cent to 0.5 per cent, holding fire for a second meeting following its landmark quarterpoint rate rise in December 2015. Ms Yellen in December set the Fed on a course of gradual increases in shortterm rates, with policymakers at that time forecasting four quarter point rises over 2016. But the outlook became clouded earlier this year by plunging commodity and stock prices, haphazard policymaking in China, and worries over weaker global growth. On Wednesday Fed ratesetters signalled they want to steer a more cautious course amid http://www.ft.com/intl/cms/s/0/a69ca30aeba011e5bb792303682345c8.html#axzz439zcjZgX 1/6 3/20/2016 Fed scales back forecasts for rate rises amid global risks FT.com uncertainty over the strength of global growth. This came despite a broadly positive assessment of the US economy's performance, noting that inflation had picked up, the labour market was strengthening, and the economy had continued to expand moderately despite the hazards overseas. Despite recent improvements in markets, the statement noted that \"global economic and financial developments continue to pose risks\". The central bank added that inflation was expected to stay low in the medium term, before rising towards its 2 per cent target. \"It's a pretty sizeable reassessment,\" said Gregory Peters, a bond fund manager at Prudential, the US insurance company. \"It's pretty bullish for sentiment and it's much more dovish than I anticipated. It's a not too subtle shift in their thinking.\" The Federal Reserve's more dovish stance on interest rate increases sent the twoyear Treasury yield sliding from 0.98 per cent to 0.87 per cent, and erased the S&P 500's earlier loss to lift it 0.5 per cent on the day. The US stock market has now clawed back almost all the losses from January and February's turmoil. The dollar had started the day on a strong footing but slid 0.9 per cent against the euro to $1.12. The revised \"dots\" that signify where Fed policymakers see the benchmark interest rate heading this year narrowed the gap between the central bank and investors' expectations. http://www.ft.com/intl/cms/s/0/a69ca30aeba011e5bb792303682345c8.html#axzz439zcjZgX 2/6 3/20/2016 Fed scales back forecasts for rate rises amid global risks FT.com Investors are still markedly more dovish than the Fed, and the cautious tone of the central bank's statement and projections emboldened some to pare back their expectations further. Markets see only a 22 per cent chance of the Fed raising rates twice this year, and a 6 per cent possibility that it lifts rates three or more times in 2016, according to Bloomberg calculations from interest rate futures. Fed funds futures indicate that the Fed is still narrowly more likely to hold fire for the entire year than lift interest rates by the planned two times. Before the central bank's latest assessment, interest rate futures had indicated that the Fed's June 15 meeting was the most likely timing for the next rate increase. Afterwards, they pointed to the next rate rise coming in September. http://www.ft.com/intl/cms/s/0/a69ca30aeba011e5bb792303682345c8.html#axzz439zcjZgX 3/6 3/20/2016 Fed scales back forecasts for rate rises amid global risks FT.com Going into Wednesday's meeting, Fed policymakers remained divided over the significance to the US of the threat from overseas developments and low inflation expectations. In January, the Fed decided the global situation was so murky that it could not form a judgment on whether the potential hazards ahead outweighed the possibility of positive surprises, and that remained the case on Wednesday. Esther George, the hawkish head of the Kansas City Fed, dissented from Wednesday's decision to leave rates unchanged, as she advocated an immediate increase in the federal funds rate at the meeting. The Fed has repeatedly stressed that upward moves in its key rate will come at a gradual pace a message reiterated on Wednesday. The central question remains how gradual that turns out to be. The Fed's median forecast on Wednesday suggested rates will rise to 0.875 per cent by the end of this year, and then be lifted by another percentage point in 2017. The longerrun estimate of the policy rate was trimmed to 3.25 per cent. Meanwhile the Fed trimmed back its median 2016 growth forecast to 2.2 per cent and its 2017 outlook to 2.1 per cent. Its outlook for core inflation remained largely unchanged, however, with policymakers predicting it will be 1.6 per cent at the end of 2016 before rising to 2 per cent in 2018. http://www.ft.com/intl/cms/s/0/a69ca30aeba011e5bb792303682345c8.html#axzz439zcjZgX 4/6 3/20/2016 Fed scales back forecasts for rate rises amid global risks FT.com Policymakers forecast further strength in the US jobs market, with the unemployment rate predicted to slip to 4.5 per cent by 2018, lower than the prior 4.7 per cent forecast. Their estimate of the longerrun rate of joblessness was trimmed to 4.8 per cent from 4.9 per cent. The Fed said on Wednesday that marketbased inflation expectations had remained low surveybased expectations were little changed. More than fourfifths of economists polled by the Financial Times this month said the Fed would lift rates two times or fewer this year. The threat that rates would remain lower for longer pushed down shares in several of the largest US banks on Wednesday. Bank of America briefly dropped as much as 3.5 per cent, Morgan Stanley 2.8 per cent and Citigroup 2.6 per cent before recovering some of their losses. Ultra loose monetary policy has hurt banks' profits. Rock bottom rates have pushed net interest margins the spread that lenders earn between what they pay depositors and what they earn on loans to historic lows. This week James Chessen, chief economist of the American Bankers Association, said the Fed should set a \"firm path\" to higher rates. RELATED TOPICS Share Federal Reserve, United States of America, Central Banks, US Interest Rates, US Ination Author alerts My City: Havana Print Clip Gift Article Valeant spotting the dangers Comments Gold our dangerous obsession VIDEOS http://www.ft.com/intl/cms/s/0/a69ca30aeba011e5bb792303682345c8.html#axzz439zcjZgX 5/6 3/20/2016 Fed scales back forecasts for rate rises amid global risks FT.com Printed from: http://www.ft.com/cms/s/0/a69ca30aeba011e5bb792303682345c8.html Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others. THE FINANCIAL TIMES LTD 2016 FT and 'Financial Times' are trademarks of The Financial Times Ltd. http://www.ft.com/intl/cms/s/0/a69ca30aeba011e5bb792303682345c8.html#axzz439zcjZgX 6/6
