In December the Fed, the central bank of the United States, changed the wording of its guidance to the phrase that it would be "patient" in normalizing policy - shorthand for raising rates - from the previous phrase that it would maintain the current rate for "a considerable time" after the conclusion of quantitative easing last October.
Economists had expected the Fed to change the words it uses to describe the U.S. economy in light of the strong expansion seen in the second and third quarters, with quarterly growth rates of 4.6 percent and 5.0 percent, respectively.
Like other central banks, the Fed also acknowledged that the sharp drop in crude oil prices and energy prices, have "boosted household purchasing power," but this has also led to a decline in inflation to "further below" its long-run objective of 2.0 percent.
In contrast to its statement on Dec. 17, when the Fed said it expected inflation to rise gradually toward its target, it said today that inflation is expected to decline further in the near term before gradually rising toward 2 percent over the medium term as the labor market continues to improve and the transitory effects of lower energy prices dissipate.
Consumer price inflation dropped to 0.8 percent in December from 1.3 percent in November while core inflation, which excludes some volatile items, eased to 1.6 percent from 1.7 percent. In December the unemployment rate fell to 5.6 percent from 5.8 percent.
Unlike December, today's statement by the Fed's policy committee, the Federal Open Market Committee (FOMC), was agreed unanimously. In December Richard Fisher, Narayana Kocherlakota and Charles Plosser had voted against the statement.
The Fed has held its fed funds rate steady since December 2008 but is gradually moving toward its first rate rise, expected later this year, following the conclusion of asset purchases in October.
The Board of Governors of the Federal Reserve System issued the following statement:
"Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account 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. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams."