Fed Holds on Rate Hike
The Federal Open Market Committee, as expected, left the federal funds rate alone yesterday following its April policy meeting, noting a slowdown in economic activity over the past several months.
“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term,” the FOMC said in its statement (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170503a.htm).
Mortgage Bankers Association Vice President of Research and Economics Lynn Fisher said the FOMC statement characterized job growth and consumption as “solid” but noted that its preferred measure of core inflation continues to run a bit below their 2 percent objective.
“MBA continues to forecast that the FOMC will raise rates at its meeting in June and again in September,” Fisher said. “It also remains likely that the committee will begin allowing assets to run off their balance sheet by the end of the year which, over time, may exert upward pressure on the spread between mortgage interest rates and Treasury yields. For now, the FOMC confirmed today that it will continue reinvesting principal so as to maintain current balance sheet levels.”
John Silvia, chief economist with Wells Fargo Securities, Charlotte, N.C., said while acknowledging “growth in economic activity slowed,” the Fed largely looked past recent disappointing economic numbers meeting and agreed the FOMC remains on track for a June rate hike.
“The policy statement from today’s FOMC meeting went to great lengths to downplay the recent shortfall in economic growth in the opening paragraph, noting that the “growth in economic activity slowed,” Silvia said. “Focusing on the growth rate drives home the Fed’s view of the softer economic data as very temporary. If the Fed simply said economic activity slowed then it might be tough to justify another quarter-point rate hike until economic activity picked up again, which would push the Fed’s next move into late summer or beyond.”
The FOMC statement appears below:
“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.”
