United States: Fed keeps monetary policy unchanged
March 20, 2013
At its policy meeting on 19-20 March, the Federal Open Market Committee (FOMC) reaffirmed its monetary policy stance. The FOMC announced that the target range for the federal funds rates will remain at the current range of between 0.00% and 0.25% at least as long as the unemployment rate remains above 6.5% and providing that long-term inflation expectations remain well anchored. Moreover, the Fed announced it will continue with its programmes of monthly purchases of USD 45 billion of long-term Treasury securities and USD 40 billion of mortgage-backed securities, in addition to reinvesting the principal payments from its holdings. The pace at which the Fed purchases assets will be reduced once employment growth picks up at a steady rate. All these decisions were in line with market expectations.
The Fed stated that data suggest a return to moderate economic growth. Moreover, monetary authorities noted that the labour market and household spending are showing signs of improvement but that unemployment still remains elevated. Although the Fed continues to see downside risks to the economic outlook, the Committee expects that "with appropriate policy accommodation, economic growth will proceed at a moderate pace and unemployment will gradually decline."
Regarding price developments, monetary authorities explained that inflation "has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices" while adding that long-term inflation expectations have remained stable. The Fed continues to anticipate that inflation over the medium term will "likely run at or below its 2 percent objective".
Against this backdrop, the FOMC slightly downgraded its growth projections and now expects GDP to grow between 2.0%-3.0% this year (previously expected: 2.0%-3.2%) and the unemployment rate to range between 6.9%-7.6% (previously expected: 6.9%-7.8%). Consensus Forecast panellists expect the Fed to remain on hold this year and the next, with the federal funds rate at 0.19% in 2013 and 0.28 in 2014.