United States Monetary Policy January 2016

United States

Fed pauses in January, path of future rate hikes uncertain

At its 26–27 January policy meeting, the Federal Reserve’s Open Market Committee (FOMC) decided to keep interest rates unchanged. The Fed hiked rates for the first time since before the global financial crisis at its previous meeting in December and also signaled that subsequent tightening moves this year would depend on economic developments and likely be very gradual. Analysts were not expecting the Fed to make another big announcement in January, particularly as instability in the global economic environment continues. However, there is a raging debate among analysts as to whether the Fed’s initial rate increase last month came too late or too soon, if any more hikes will be warranted this year, and what tools would be available to boost the economy in the case of a sharp slowdown.

The Fed’s latest accompanying statement contained a few changes which reflect developments during the past month. The Fed stated that there have been further improvements in the labor market, but acknowledged that economic growth slowed toward the end of last year, with household spending and business investment increasing only at moderate rates. The comment from the last statement about the risks to the outlook for economic growth and the labor market being balanced was removed entirely, reflecting a more cautious assessment of the economic situation. Moreover, the Fed once again mentioned that it was, “closely monitoring global economic and financial developments,” after having omitted reference to global conditions in its previous release. Overall, the accompanying statement exhibited a renewed sense of concern.

In terms of price developments, the Fed pointed out that inflation continues to be below its longer-run target of 2.0%, although inflation expectations have changed little. The Fed still expects inflation to rise toward its 2.0% objective over the medium term as the effects of lower energy and import prices dissipate and as the labor market gathers more strength. However, the Fed did note that the recent further declines in energy prices will keep inflation contained in the near term.

Ultimately, the Fed decided to keep the Federal Funds Target Rate at a range of between 0.25% and 0.50%, which is still highly accommodative and should continue to support the economy. Looking forward, the possibility of additional rate hikes this year is still very much on the table, although implementation would undoubtedly be very gradual. The Fed emphasized that the timing and size of further adjustments will depend on actual and expected economic developments. The Fed does not have a fixed calendar in mind or a mechanical formula with which to determine the pace of subsequent rate hikes. Analysts generally have pulled back on the number of expected hikes in 2016, with a move at the next meeting in March highly unlikely, but still expect more big news from the Fed before the year ends. Lewis Alexander, Chief U.S. Economist at Nomura, commented on the Fed’s pause and the market’s reaction:

“Today’s FOMC statement highlighted a challenge for the FOMC and market participants. The Fed, in effect, acknowledged that recent economic data have been weak and that recent financial and foreign developments may pose a risk to the US economy. Those conclusions are not really surprising and they have been reflected in financial markets for some time. Essentially, the FOMC was sending a signal that its assessment of the outlook may be moving closer to that of the market. But financial markets took the FOMC’s statements not as a sign that the gap between the market and the Fed was closing, but rather as a reason to reduce their expectations for future rate hikes even more. That may have been an overreaction. We would still argue that the right forecast is for two increases in short-term interest rates this year, while the market is pricing only about one.”

Given the potential for volatility in global markets to linger or worsen in the coming months and continued uncertainty about the strength of the domestic economy going forward, it is hard to predict what the Fed will do during the course of the year. However, as stated repeatedly by Fed officials, any changes in monetary policy will depend on economic developments.

FocusEconomics Consensus Forecast panelists expect that the pace of rate hikes in the coming years to be very gradual. The panel sees the Federal Funds Rate averaging 1.20% at the end of 2016 and projects that it will increase to 2.15% by the end of 2017.

Author:, Economist

Sample Report

Looking for forecasts related to Monetary Policy in United States? Download a sample report now.


United States Economic News

More news

Search form