United States Monetary Policy

United States

United States: Fed downplays Q1 economic slowdown, keeps markets guessing about timing of first rate hike

April 30, 2015

At its 28–29 April policy meeting, the Fed’s Open Market Committee (FOMC) recognized that the economy lost momentum in the first quarter but suggested that a rebound should take place in the months ahead. However, the Fed refrained from offering additional clarity regarding when it may start boosting the federal funds rate. The Fed has been avoiding a fixed timeline amid worries that a premature rate hike will threaten a recovery that has taken years to solidify and the latest patch of economic weakness provides a buffer to postpone making a policy change announcement. While a rate hike at the meeting in June has not been ruled out, a first move seems more likely to occur at the following gathering in September, or perhaps even later.

The Fed’s accompanying statement gave a less upbeat assessment of the economy compared to its last meeting, as expected given recent developments. The Fed acknowledged that the pace of economic growth moderated during the winter months due to transitory factors, presumably the harsh weather. Latest data show that gains in the labor market slowed and the unemployment rate was unchanged. Household spending has also slowed, despite the rise in real incomes generated by lower energy prices. In addition, business fixed investment has softened and exports have declined given the dollar’s strength against other currencies.

In terms of price developments, monetary authorities explained that inflation has, “continued to run below the Committee’s longer run objective,” due to low energy prices and weak prices for imported goods. Market-based measures of inflation are low and survey-based measures of longer-term inflation expectations remain stable. However, the effects of lower energy and import prices are projected to dissipate and inflation is still expected to rise toward 2.0% over the medium term.

In order to foster growth in the economy and stoke inflationary pressures, the FOMC confirmed that the federal funds target rate would remain within the current range of between 0.00% and 0.25%. Despite the loss of growth momentum in the first quarter, the Fed believes that this accommodative policy will help economic output bounce back and strengthen the labor market.

Looking forward, 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 Committee stated that it will not raise rates until there have been further improvements in the labor market and until it is “reasonably confident that inflation will move back to its 2.0% objective.” Moreover, the Fed removed all calendar-based references from its forward guidance and is now operating on a strictly data-dependent framework, which will keep analysts guessing about the timing of an initial rate hike. Regardless of when and how the Fed starts its normalization process, interest rates are expected to remain at historically low levels for an extended period of time.

FocusEconomics Consensus Forecast panelists expect the Fed to hike interest rates at some point later this year. The majority of panelists surveyed expect that the Fed will have raised interest rates by Q3 2015, with an average forecast of 0.49%. The panel sees the federal funds rate averaging 0.70% at the end of 2015 and project that it will increase to 1.86% by the end of 2016.


Author:, Economist

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USA Monetary Policy April 2015 0

Note: Total assets on the balance sheet of the Federal Reserve in USD billion and Federal Funds Target Rate in %. Current rate set at a range of between 0% and 0.25%.
Source: Federal Reserve


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