Fed Stays Put
The Federal Open Market Committee opted for no surprises yesterday, holding the federal funds rate at 0.50-0.75 percent while maintaining its position that it will likely raise rates later this year.
Meeting yesterday in Washington, the FOMC noted continued strength in the labor market and modest economic expansion with “moderate” household spending.
“In its first meeting of 2017, the Federal Reserve voted unanimously to maintain their current monetary policy stance, keeping short-term rates unchanged and maintaining their reinvestments for mortgage-backed securities and longer-term Treasuries,” said Mortgage Bankers Association Chief Economist Mike Fratantoni.
MBA forecast the FOMC will likely hike the federal funds rate three times this year; Fratantoni said yesterday’s action did nothing to dissuade that forecast.
“Given the continued improvements in the job market and the increases in inflation, we are holding to our forecast of three Fed rate hikes for 2017, with the first hike most likely coming in June, but could happen as early as their next meeting in March,” Fratantoni said. “We also expect that Federal Reserve officials will be talking much more in 2017 about tapering or stopping reinvestments, which could lead to wider mortgage-Treasury spreads.”
The FOMC statement (https://www.federalreserve.gov/newsevents/press/monetary/20170201a.htm) appears below:
“Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most 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 expects 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 rise to 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 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening 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; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Daniel K. Tarullo.”
