Two Fed rate rises still possible in 2015, but slower thereafter

The Federal Reserve may yet raise interest rates twice in what remains of 2015, the latest set of economic projections from the Fed´s rate-setters showed.

However, stocks jumped back into the green as it became apparent that the more medium-term interest rate projections had been nudged slightly lower, by 25 basis points for both 2016 and 2017.

The median estimate for interest rates from the Federal Open Market Committee´s members at the end of 2016 was lowered to 1.625% from 1.875% in March.

As of 19:28, and ahead of the start of Janet Yellen´s press conference, at 19:30, the Dow Jones Industrials rose 0.01% or five points to 17,910 while the S&P 500 was flat at 2,096. Both equity benchmarks had sprinted into the green earlier on the news that medium-term interest rate projections had decreased.

The yield on the benchmark 10-year US Treasury note was four basis points higher to 2.36%.

That came as the US central bank decided to keep the range for its main policy rate unchanged at between 0% and 0.25%, as expected by economists.

In the statement released following Wednesday´s meeting, the Federal Open Market Committee repeated that risks to the outlook for the economy continued to be nearly balanced.

However, on this occasion the central bank said the underutilisation of resources in the labour market had “diminished somewhat [since the last meeting]”. In April the Fed had stated that underutiliastion “was little changed”.

On the other hand, “growth in household spending has been moderate,” the US central bank also said.

Some economists had been expecting a more upbeat interpretation of the recent data on household consumption.

"rising wage growth and core price inflation will force the Fed to raise"

Yellen´s response

During her press conference Yellen said it was not yet clear to what extent consumers were trying to rebuild their savings, cautious on the economic outlook or simply 'looking-through' the windfall from the drop in oil prices.

Nevertheless, she acknowledged the recent pick-up in consumption.

On the subject of Greece, Yellen said she saw potential for disruptions to the Eurozone economy and global financial markets.

2015 GDP forecast cut

FOMC participants lowered their median 2015 projection for gross domestic product growth to between 1.8% and 2.0% from the 2.3% to 2.7% range envisaged in March.

The bottom end of the range for their 2016 and 2017 GDP forecasts were both revised slightly higher.

The long-run estimate for the unemployment rate was revised slightly higher, against some analysts´ expectations.

FOMC 'behind the curve', think-tank says. Dovish dot-plot, Goldman says

Paul Ashworth, chief US economist at Capital Economics, highlighted a shift in the Fed´s language on the subject of the country´s labour market.

Wednesday´s FOMC statement stated that labour market slack had "diminished somewhat" whereas the statement in April suggested slack had been "little changed", Ashworth explained in a research note e-mailed to clients.

"Our view is still that rising wage growth and core price inflation will force the Fed to raise the target range for the fed funds rate to between 0.75% and 1.00% by end-2015 and then to between 2.75% and 3.00% by end-2016. The latter would be much higher than either Fed officials or the markets currently anticipate," he added.

"The June FOMC "dot plot" showed a larger-than-expected drift downward in projections for the fed funds rate at the end of 2015. Although the median dot remained consistent with a September hike, the "leadership dots" appear to be split between one and two hikes this year," was the view of Goldman Sachs´s Global Macro Research team.

"This gap increases the risk that the Fed is falling (further) behind the curve, encouraging the build-up of asset price bubbles," was the opinion of Dr.Harm Bandholz, chief US economist at Unicredit Research.