Fed Holds Steady on Rates, Reduces Rate Hike Projections

The Federal Open Market Committee, as expected, held the federal funds rate at its policy meeting yesterday.

But the meeting wasn’t as much about the federal funds rate as it was other economic matters. Mike Fratantoni, chief economist with the Mortgage Bankers Association, said the Fed took a number of factors into account, including jobs, housing and even the upcoming U.K. referendum on whether or not to leave the European Union.

“Given the weak job market report for May, it was no surprise that the FOMC decided to hold the fed funds rate target unchanged following their June 2016 meeting,” Fratantoni said. “The Committee noted that the pace of economic activity has picked up and there continued to be positive news with respect to the housing sector and consumer spending, but that the pace of job growth has slowed significantly.”

Fratantoni noted in her comments at a press conference following the meeting, Fed Chair Janet Yellen noted that the potential for the UK leaving the European Union (“Brexit”) has the potential to negatively impact the U.S. economy.

“The pending Brexit vote next week has already brought U.S. interest rates lower again, with 10-year Treasury rates down more than 30 basis points from their recent peak,” Fratantoni said.

The 30-year fixed mortgage rate fell to its lowest level, 3.79 percent, last week MBA reported yesterday in its Weekly Mortgage Applications Survey.

Fratantoni also noted unlike previous meetings, there were no dissents from voting members of the FOMC in the decision to keep rates unchanged.

On the possibility of future rate hikes, Fratantoni said the FOMC’s economic projections showed a slightly less optimistic outlook compared to the March projections, with fewer members predicting two rate hikes for 2016. “The market reaction through Wednesday was to lower interest rates further, with 10-year Treasuries down about 4 basis points for the day,” he said.

The FOMC statement appears below (edited slightly for paragraph breaks):

Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened.

Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to 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.

In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. 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.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.