A gentler rate path for U.S. economy

As expected, the Fed removed the reference to patience, but it surprised by significantly lowering its estimates of the appropriate rate path. 

The median forecast for the end of 2015 now stands at 0.625% (vs. 1.125%). The year-end 2016 projection moved from 2.5% to 1.875% and the year-end 2017 projection moved from 3.625% to 3.125%. 

The Committee revised down its nearterm inflation forecasts, both for headline and core inflation. 

It now expects core PCE inflation to remain virtually unchanged this year in the 1.3%-1.4% range. Importantly, the Committee did not revise its medium-term projections and it still expects inflation to return to 2% by the end of 2017. 

However, given the lower near-term trajectory, it probably has less confidence in its forecast. 

Societe Generale notes....

• The Fed's forecasts now suggest that the economy will reach full employment by the end of this year, and subsequently overshoot, albeit by a small margin.
  
  
• The Fed now expects a longer period of convergence to neutral rates. As of December, the FOMC's median rate forecast converged to its estimate of a longer-run neutral policy rate by 2017. 
  
  
• Based on the new projections, convergence is pushed beyond the FOMC's forecast horizon, most likely to 2018. So, the FOMC may be getting less patient, but it is by no means hasty. On the contrary, it is now guiding toward a much friendlier rate path for the economy and the financial markets.