Wednesday, April 29, 2015

US Fed holds rate as harsh winter hits economic growth

    The U.S. Federal Reserve held its benchmark federal funds rate steady and repeated that it will first raise its target from 0-0.25 percent "when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
    In its statement, the Federal Open Market Committee (FOMC), the Fed's policy making body, acknowledged that the U.S. economy had "slowed during the winter months, in part reflecting transitory factors," as the pace of job gains had moderated, household spending had declined household, fixed investment had softened and exports had declined.
    In addition, inflation remains below the Fed's objective, partly reflecting the earlier decline in energy prices and lower price of non-energy imports, partly due to the stronger dollar.
    Unlike its statement in March, the FOMC did not make any references to dates.
    Last month, when the Fed changed its guidance by dropping the word "patient" and replacing it with the current statement that it is looking for further improvement in jobs and inflation, it added that an increase in the fed funds rate was unlikely in April.
    The fed funds rate has been steady at the current level since the depth of the global financial crises in December 2008.
    The Fed's emphasis on how the U.S. economy has slowed, and a unanimous vote by the FOMC members, shows there is little immediate pressure to raise rates in coming months.
    Earlier today it became clear just how much the economy slowed in the first quarter, with Gross Domestic Product up by only 0.2 percent from the fourth quarter's 2.2 percent expansion.
    However, there is still considerable economic momentum in the U.S. economy, which is forecast by the International Monetary Fund to expand by 3.1 percent this year, up from 2014's 2.4 percent.
    When compared with the first quarter of 2014, when economic activity was also hit by adverse winter weather, economic output in the January-March period was up by  3.0 percent, up from the fourth quarters's 2.4 percent pace and the strongest since the fourth quarter of 2013.
     Despite the decline in household spending noted by the Fed, it also said that real incomes had risen strongly due to lower energy prices and consumer sentiment remains high.
     But there is little inflationary pressure right now, with consumer prices down by 0.1 percent in March after no change in February, the eight consecutive month of prices below 2.0 percent.

    The Federal Reserve issued the following statement:

"Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; 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. Although growth in output and employment slowed during the first quarter, the Committee continues to expect 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 remain near its recent low level 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 declines in energy and import prices 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. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

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."


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