United States Monetary Policy

United States

Fed remains on hold but hints at future action

At its policy meeting on 31 July - 1 August, the Federal Open Market Committee (FOMC) left the federal funds rate within the historically-low range of 0% to 0.25% established in December 2008. The Committee also decided to continue its average maturity extension programme, commonly referred to as Operation Twist, until the end of the year, as previously announced in June. All these decisions were expected by the market. The Fed stated that inflation has declined in recent months as a result of lower prices for crude oil and gasoline, while adding that long-term inflation expectations have remained stable. According to the Committee, "inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate". Monetary authorities noted that growth in employment has been slow in recent months and that the unemployment rate remains elevated, while adding that the housing sector remains depressed despite some further signs of improvement. The Fed expects "economic growth to remain moderate over coming quarters and then pick up very gradually" and "consequently anticipate that the unemployment rate will decline only slowly" going forward. Against this backdrop, the Committee reiterated that it expects the federal funds rate to remain at exceptionally low levels at least through late 2014. Although the wording of the FOMC statement was nearly unchanged from the previous meeting, the document did contain one important change, as the Fed announced that it "will provide additional accommodation as needed to promote a stronger economic recovery". According to a majority of analysts, the new phrasing suggests that the Federal Reserve may embark in a new round of quantitative easing at its next policy meeting in September.


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