United States: Fed keeps policy rate unchanged and clarifies tapering plans
July 31, 2013
At its policy meeting on 30-31 July, the Federal Open Market Committee (FOMC) recognized that the economy grew at a modest pace during the first half of the year and confirmed that the Fed will maintain its asset purchasing strategy going forward. Statements from the policy meeting in June which suggested that the Fed will start tapering purchases as early as this year generated significant unease within the market. The recent FOMC statement, however, clarified the Fed's intentions: the Fed will continue its monthly purchases of USD 45 billion of long-term Treasury securities and USD 40 billion of mortgage-backed securities, "until the outlook for the labor market has improved substantially in a context of price stability." The Fed made it clear that purchase tapering is contingent on continued economic improvements; it is not on a pre-determined course.
According to the Fed, recent data suggest that the labor market has improved in recent months, although unemployment is still high. Household spending, business fixed investment and the housing sector have also strengthened, but rising mortgage rates and tightened fiscal policy are holding back economic growth. The Fed plans to continue monitoring economic data to determine the right time to start tapering off asset purchases.
The FOMC announced that the federal funds rate target will remain at the current range of between 0.00% and 0.25% for at least as long as the unemployment rate remains above 6.5%, short-term inflation is no more than half a percentage point above the Committee's 2% goal, and long-term inflation expectations remain well anchored. In terms of price developments, monetary authorities explained that inflation continues to run, "somewhat below the Committee's longer-run objective," while adding that long-term inflation expectations have remained stable. The Fed anticipates that inflation will, "move back toward its objective over the medium term."
FocusEconomics Consensus Forecast panellists expect the Fed to remain on hold this year and the next, with the federal funds rate to average 0.19% in 2013 and 0.19% in 2014.
Author: Carl Kelly, Economist