No one expected the Federal Reserve to make any changes to monetary policy at today’s meeting and there were no surprises. The Fed continued to say it would be “patient” before raising short-term interest rates, which means the Fed is very unlikely to raise rates through at least April.

However, the Fed did make some noticeable changes to the language in the statement, upgrading its assessment of both economic growth and the labor market, while recognizing both lower inflation (due to falling energy prices) and lower market-based measures of inflation expectations. Ultimately, though, the Fed’s forecast is that the eventual end of energy price declines as well as the improving labor market will push inflation back up toward its target of 2%.

Unlike the past several meetings, this one appears to have been much less contentious. Three voting members dissented at the December meeting; this time, no one dissented, the first time that’s happened since the meeting in June 2014. Both the hawks and doves who previously dissented are no longer voting members this year.

All of this is consistent with our view that the Fed is still on track to start raising rates in June. It is unlikely to raise rates at every meeting, as was done in the past two prolonged rate hike cycles under Alan Greenspan in the late 1990s and Ben Bernanke in the middle of the prior decade. Instead, the Fed will probably raise rates at every other meeting for the first year, before embarking on a more aggressive path in the second half of 2016 and beyond.

Another issue is when the Fed’s balance sheet will go back to normal. We’re still forecasting that the Fed will keep reinvesting principal payments from its asset holdings to maintain the balance sheet at roughly $4.4 trillion through at least late 2015.

The bottom line is that while the Fed is still behind the curve, it’s at least finally pointed in the right direction, and, barring some major shift in its outlook for the economy, the clock is ticking on rate hikes. Nominal GDP – real GDP growth plus inflation – is up 4.3% in the past year and up at a 4.0% annual rate in the past two years. A federal funds target rate of nearly zero is too low given this growth. It’s also too low given well-tailored policy tools like the Taylor Rule.

In the meantime, hyperinflation is not in the cards; the Fed will keep paying banks enough to keep the money multiplier depressed. But, given loose policy, we expect gradually faster growth in nominal GDP for the next couple of years. In turn, the bull market in equities will continue and the bond market is due for a fall.

 This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy. 

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