Fed, Citing ‘Global Economic Concerns,’ Holds on Rates
If you put money on the Federal Reserve raising interest rates this month, you lost.
The Federal Open Market Committee put off its decision to raise the federal funds rate, which has held steady at 0-0.25 percent since December 2008, yet again. In its statement issued yesterday afternoon (http://www.federalreserve.gov/newsevents/press/monetary/20150917a.htm), the FOMC cited “recent global economic and financial developments” that could restrain economic activity and were likely to put further downward pressure on inflation in the near term.
“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 vote, however, was not unanimous. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, cast a dissent, saying he preferred to raise the target range for the federal funds rate by 25 basis points.
Mortgage Bankers Association Chief Economist Mike Fratantoni noted the economy is growing and the job market continues to improve, but slower growth abroad and tighter financial conditions convinced Fed policymakers to wait at least one more meeting to increase rates.
“The FOMC statement, which provided more definitive guidance stating that an increase will likely occur later this year, should help to reduce recent market volatility, which has been caused by the significant uncertainty about the Fed’s decision at this September meeting,” Fratantoni said. “However, even though a majority of Fed officials still expect a rate increase before the end of 2015, that number has decreased from 15 in June to 13 in September. There was one dissenting vote at this meeting from Richmond Fed President Jeff Lacker, which indicates that there continues to be disagreement regarding the pace of tightening that would best support growth while preventing inflation from creeping back into the economy.”
Fratantoni said in her press conference, Fed Chair Janet Yellen highlighted that the Fed remains data dependent, i.e. it will track a wide range of indicators to determine when they would raise rates. “She also reminded the markets that the exact date of the initial increase is less important than the pace and ultimate endpoint of rate increases,” he said. “She said that policy would remain highly accommodative and rate increases will be gradual. With regards to low inflation, Chair Yellen emphasized more than once that those factors holding inflation down are transitory and will likely dissipate over time.”
Fratantoni said MBA continues to expect that rates will trend up over the medium term. He said mortgages rates, which have been just above 4 percent recently, are likely to end 2015 closer to 4.3 percent, and could reach 5 percent by the end of 2016.
“This increase in rates will lead to a reduction in refinance activity,” Fratantoni said. “However, the continued strengthening of the job market will more than offset the gradual increase in rates, and we continue to forecast stronger housing markets in the year ahead.”
The full FOMC statement appears below:
“Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators 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 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. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, 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 developments abroad. 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 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. 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.”
