United States: Fed continues to signal patience regarding first interest rate hike
January 29, 2015
At its 28–29 January policy meeting, the Fed’s Open Market Committee (FOMC) refrained once again from providing a definite date for when it will start boosting the federal funds target rate. While the Fed did remove the phrase “considerable time” from its statement, it explained that it would continue to be patient about its decision to begin normalizing monetary policy. The Fed has been avoiding a fixed timeline as it believes the current historically-low rate is providing important support for the economy and because it wants to be able to respond flexibly to any potential changes in the economic scenario.
The Fed’s accompanying statement gave a more upbeat assessment of the economy compared to that of the last meeting. According to the Fed, the economy has been expanding at a solid pace and there have been further gains in the labor market. In addition to a lower unemployment rate, the Fed also pointed out that the, “underutilization of labor resources continues to diminish.” Moreover, household spending is on the rise amid increased purchasing power stemming from the decline in energy prices. Business fixed investment is also advancing, although recovery in the housing market continues to be slow.
In terms of price developments, monetary authorities explained that inflation has, “continued to run below the Committee’s longer-run objective,” due in large part to declining energy prices. While market-based measures of inflation have fallen substantially in recent months, long-term inflation expectations have remained stable and the effects of lower energy prices are projected to be transitory. Moreover, the FOMC expects that inflation will rise gradually towards the 2.0% target over the “medium term.”
Against this backdrop, and in order to maintain positive momentum in the economy, the FOMC confirmed that the federal funds target rate would remain within the current range of between 0.00% and 0.25%. The Fed emphasized once again that decisions to hike the rate still depend on the assessment of 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 need to consider global developments as an important factor was added just this month and reflects the contrast with other central banks that are pushing stimulus measures at a time when the Fed is looking to pull back its loose monetary policies. The ECB announced a massive EUR 1 trillion quantitative easing plan last week, similar to the plan the Fed implemented after the financial crisis and wrapped up last year.
While this month’s decision received unanimous support from all committee members, there is ongoing debate within the Fed over when to raise interest rates. Moreover, given that no clear timeline has been provided, speculation is rife among market analysts. While the possibility of a first rate hike in June was inferred from the Fed’s previous statement, there is growing doubt about a mid-year move. Analysts are now anxiously awaiting more specific guidance that is likely to come at the next meeting scheduled for 18 March. In the meantime, persistently-low inflationary pressures and uneasy international conditions will stoke the debate.
Author: Carl Kelly, Economist