For those looking for a rate hike, the Federal Reserve’s Open Market Committee (FOMC) is not yet delivering just yet. The FOMC voted nine to one to keep fed funds steady at 0.25% to 0.50%. Janet Yellen’s Federal Reserve team has also trimmed expectations for rate hikes ahead.
Since the January meeting, economic activity has been expanding at a moderate pace, despite the global economic and financial developments of recent months. This is a more dovish tone by the Federal Reserve than we were getting earlier this year.
The new midpoint is for only two rate hikes in 2016, and a lower base-case for fed funds in 2017 too. There had been a telegraph of up to four rate hikes previously, and this now brings the Fed closer to what the financial markets (and fed funds futures) have been saying.
Other key issues were that household spending has been increasing at a moderate rate. The housing sector has improved further. Strong job gains point to additional strengthening of the labor market. On the cautious side, business fixed investment and net exports have been soft.
Inflation picked up in recent months, but continued to run below the FOMC’s 2% longer-run objective due to lower energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
The new statement showed that expectations are that economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. That being said, the FOMC noted that global economic and financial developments continue to pose risks.
As for the time and size of rate hikes ahead, the FOMC will assess realized and expected economic conditions against its dual mandate (full employment and 2% inflation). An additional portion of the statement for a quote said:
The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
While nine Fed president votes were for no rate changes, Esther George was in favor of raising the target range for the federal funds rate to one-half to three-quarters percent.
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