Fed Holds the Line One More Time

Amid fierce speculation as to when the Federal Reserve would being raising key interest rates, the Federal Open Market Committee yesterday held back, as it has every meeting since December 2008.  

But the Fed statement (http://www.federalreserve.gov/newsevents/press/monetary/20151028a.htm) also suggested that its long-anticipated decision to start raising the federal funds rate could come at its next meeting, in December.  

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation,” the Fed said.  

Mike Fratantoni, chief economist with the Mortgage Bankers Association, noted while the Fed’s assessment of the economy was “little changed” in its statement, the FOMC appeared to downgrade risks from abroad, removing language from its previous statement that global issues “may restrain economic activity.”   

“The Fed sees strength in consumer spending and a recovering housing market, and continues to see and expect improvements in the job market, although at a somewhat slower pace going forward,” Fratantoni said. “Inflation remains low and below their target, but the Fed views this as being due to transitory factors, primarily the drop in energy prices and the strength of the dollar.”  

The real news in the Fed statement, Fratatnoni said, was the explicit calling out of the December meeting as the decision point for beginning to raise the federal funds rate.   

“In prior statements, there was a vague questioning of ‘how long’ policy would remain accommodative,” Fratantoni said. “In this statement, there was reference to how a decision would be made at the next meeting. Market expectations of an increase in the federal funds rate in December had been dropping lately, but jumped after release of this statement as indicated by the increase in Treasury yields and in the value of the dollar.”  

The decision to hold rates was not unanimous; as he did at the FOMC’s most recent meeting on Sept. 21, Federal Reserve Gov. Jeffrey Lacker voted against the Fed’s decision, saying yesterday as he did then that a 25-basis point increase in the federal funds rate was prudent now. The current rate is 0-0.25 percent.  

The full FOMC statement appears below:  

Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; 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 but is monitoring global economic and financial developments. 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 declines in energy and import prices 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 whether it will be appropriate to raise the target range at its next meeting, 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. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.  

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; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.