Thursday, September 17, 2015

U.S. Fed maintains rate, Lacker votes to raise by 25 bps

    The Federal Reserve, the central bank of the United States, maintained its benchmark federal funds rate at 0 - 0.25 percent as its policy-making Federal Open Market Committee (FOMC) voted by 9-1 to keep the rate where it has been since December 2008, with Jeffrey Lacker, president of the Richmond Fed, voting to raise the target rate by 25 basis points.
    In its statement, the FOMC repeated its recent guidance that it will first rate the rate "when it has seen some 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 latest economic projection, the Fed added a forecast for the fed funds rate, something already done by some other central banks, such as those in Sweden and New Zealand.
    This showed a median projection for the fed funds rate to average 0.4 percent this year, down from June's forecast of 0.6 percent, but still implying a rate rise this year.
    For 2016 the fed funds' rate is forecast to average 1.4 percent, down from June's 1.6 percent, but then rise to 2.6 percent in 2017 and 3.4 percent in 2018.
    There were minor tweaks in today's FOMC's statement compared with its July 29 statement, but in total they seemed to show a slightly more confident outlook apart from a possible dampening impact from weaker growth in emerging markets, including China, a likely reason for the FOMC's decision to  hold off on raising its rates today.
    "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Fed said, adding that with "appropriate policy accommodation" economic activity will continue to expand and the labor market continue to improve.
    Today it said economic activity was "expanding at a moderate pace," a slight change to July when its said economic activity has been expanding moderately in recent months."
     Lacker's vote to raise the fed funds rate was the first time this year there was a split among the FOMC members. The last time there were dissenters was in December 2014 when Richard Fisher, Narayana Kocherlakota and Charles Plosser voted against the FOMC's statement.
    In an update to its economic projections, the Fed revised upward its forecast for growth this year to 2.1 percent from June's forecast of 1.9 percent but trimmed the 2016 forecast to 2.3 percent from 2.5 percent and the 2017 forecast to 2.2 percent from 2.3 percent.
    In the second quarter, the U.S. Gross Domestic Product expanded by an annual 2.7 percent, down from 2.9 percent in the first quarter.
    While the FOMC repeated that exports were "soft," it said household spending, business investment and the housing sector had improved further,  a slight upgrade from July when it noted that business investment had stayed soft and household spending had been moderate.
    As in July, the FOMC said the labor market had continued to improve and the underutilization of labor resources had diminished.
    Employment in the U.S. has continued to rise since the depth of the financial crises in late 2009, with the unemployment rate falling to 5.1 percent in August, a level that is considered close to full employment.
    The Fed forecast for the unemployment rate this year was cut to 5.0 percent from a previous forecast of 5.3 percent, the 2016 forecast was cut to 4.8 percent from 5.1 percent and the 2017 forecast to 4.8 percent from 5.0 percent.
    Average hourly earnings rose by 0.3 percent in August while average hours worked per week rose to 34.6 hours in August, close to an all-time high of 34.7 hours in December 2006. Wages grew by an annual 4.24 growth in July but much below an all-time high of 13.8 percent in January 1979.
    But inflation continues to run well-below the Fed's objective, partly reflecting the fall in energy prices and non-energy imports.
    Consumer price inflation was steady at 0.2 percent in August, the same as in July, and only slightly above the deflation seen in the first couple of months this year.
    Headline inflation is seen averaging 1.4 percent this year, up from 1.3 percent forecast in June, and then rising to 1.7 percent in 2016 and 1.9 percent in 2017. First by 2018 is the headline rate, and the Fed's preferred gauge of personal consumption expenditure, seen hitting 2.0 percent
    The U.S. dollar rose strongly against the weak euro from May 2014 through mid-March this year.
    From May last year to mid-March, the dollar rose against the euro from around 1.39 euros to 1.05, or by 32 percent. While it has weakened a bit since then, it was trading at 1.13 to the euro today, up by 7 percent since the start of the year.

    The Federal Reserve issued the following statement:

"Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; 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. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, 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 but is monitoring developments abroad. 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 some 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; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting."


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