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March 18, 2015

U.S. Fed Losing Patience But Says No Fixed Time for Rate Raise

By Central Bank News

 The U.S. Federal Reserve will raise its key policy rate "when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective in the medium term" but an increase in April is unlikely.

    As widely expected, the Fed dropped the use of the word "patient" in its guidance to financial markets of when it would start to normalize its monetary policy and raise the benchmark federal funds rate from the 0-0.25 percent range held since December 2008.

    Instead, the Fed's policy making body, the Federal Open Market Committee (FOMC) linked any rate increase to further improvement in the jobs market and prospects of higher inflation, underlining that it had not made any decision about when it plans to raise its rate.

    In contrast to its statement from Jan. 28, the Fed described economic growth as having "moderated somewhat," a slight downgrade from its previous statement when it said economic activity had beed "expanding at a solid pace."

    Reflecting the drop in the February jobless rate to 5.5 percent from 5.7 percent in January, the Fed again said the "underutilization of labor resources continues to diminsh," but added that "export growth has weakened," an indication that the appreciation of the U.S. dollar is harming exports.

    The Fed repeated that inflation had declined further from its objective due to lower energy prices but inflation expectations have remained stable. Headline consumer price inflation fell to minus 0.1 percent in January from 0.8 percent in December while core inflation was steady at 1.6 percent. 
 The Board of Governors of the Federal Reserve System issued the following statement:

"Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams."

Source: www.CentralBankNews.info

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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