United States Monetary Policy

United States

United States: Fed errs on the side of patience regarding first interest rate hike

December 18, 2014

At its 16–17 December policy meeting, the Fed’s Open Market Committee (FOMC) offered little additional clarity regarding when it may start boosting the federal funds target rate. Many market analysts had expected that the Fed would replace the phrase “considerable time” in its previous statement with more precise guidance about how much longer the target rate will be kept at historical lows. Instead, the Fed simply added that it would be patient about its decision to begin normalizing monetary policy. The Fed is avoiding a fixed timeline as it believes the current low rate policy is providing important support for the economy and because it wants to be able to respond flexibly to any potential change in the economic scenario.

The Fed’s accompanying statement gave an upbeat assessment of the economy, very similar to that following the previous meeting. According to the Fed, economic growth continues to expand at a moderate 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 and business fixed investment are 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 part to the declining energy prices. However, 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 time.

Against this backdrop, and in order to support continued progress 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 developments.” As mentioned previously, the Fed indicated that it would likely be appropriate to maintain the current low target range for the federal funds rate for, “a considerable time following the end of its asset purchase program this month.” Moreover, the Fed, “judges that it can be patient in beginning to normalize the stance of monetary policy.”

There is ongoing debate within the Fed over when to raise interest rates. Three of the committee members dissented with this month’s statement, which hasn’t happened since September 2011. One argued that the economy has improved considerably in the past months and that the appropriate date for a rate increase is earlier than the others envision. Despite the internal debate, the committee seems quite firmly set for a rate hike to be implemented next year. The median projection made by committee members in a supplementary document released after the meeting is for rates to reach 1.125% by the end of 2015, which is down from the 1.375% median projection made in June. However, 15 of 17 members expect rates to be increased at some point in 2015. Fed Chair Janet Yellen stated in a follow-up press conference that it was unlikely that a rate hike would be appropriate for at least the next two meetings. The Fed’s next two meetings are in January and March, so the earliest move would not be until its April meeting. However, analysts generally believe that a change in policy will happen in the second half of the year.

FocusEconomics Consensus Forecast panelists expect the Fed to hike interest rates in 2015. Well over half of the panelists surveyed project that the Fed will raise rates as early as Q2 2015. The vast majority of panelists surveyed expect that the Fed will raise interest rates by Q3 2015, with an average forecast of 0.73%. The panel sees the federal funds rate averaging 0.98% at the end of 2015, and increasing to 2.22% by the end of 2016.


Author:, Economist

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USA Monetary Policy December 2014 1

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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