Wednesday, April 27, 2016

U.S. Fed holds rate, notes improving labor market

    The Federal Reserve, the central bank of the United States, left its benchmark target for the federal funds rate unchanged at 0.25 to 0.50 percent, as widely expected, and said conditions in the labour market had improved further despite a slowdown in economic activity.
    The Fed, which in March lowered its forecast for the number of likely rate hikes this year to two from four, put less emphasis on the risks facing the U.S. economy from the global economy, and merely said that it was now monitoring inflation and global economic and financial developments.
    At its last meeting in March, the Federal Open Market Committee (FOMC), the Fed's policy-making arm, underscored the risks to the U.S. economy from sharp falls in global financial markets at the start of the year on concern over China's economy and the health of emerging market economies.
    The Fed, which in December raised its rate by 25 basis points - the first rate hike since July 2006 - said a range of indicators were pointing to additional strengthening of the labor market but inflation is continuing to run below its 2 percent objective, partly due to the fall in energy prices and imports.
    And while inflation is expected to remain low in the medium term, the Fed still expects inflation to rise to 2 percent in the medium term as the temporary effect of the fall in energy and import prices dissipates and the labour market strengthens further.
    For the second meeting in a row, Esther George, president of the Kansas City Fed, voted to raise the fed funds rate by 25 basis points.
   Headline inflation in the U.S. eased to a lower-than-forecast 0.9 percent in March, down from 1.0 percent in February and 1.4 percent in January. Core inflation, as reported by the labour statistics bureau, declined for the first time in 10 months to 2.2 percent from February's 2.3 percent.
    The unemployment rate ticked up to 5.0 percent in March from 4.9 percent in the previous two months while the employment rate continued its continuous climb since late 2013 to hit almost 60 percent in March while the number of employed people rose to 151.3 million from 151.0 million in February.
    But average hourly earnings only rose by 0.3 percent in March from February while wages rose by only 4.29 percent year-on-year in February, about two percentage points below the average wage growth rates recorded in the last 50 years.
    The U.S. economy expanded by an annual 2.0 percent in the fourth quarter of last year, down from 2.1 percent in the third quarter and is expected to have slowed further in the first quarter of 2016 as the strong U.S dollar put a dent in exports and low oil prices have undermined investment in the oil and gas industry. First quarter growth data are scheduled for release on Thursday.

    The Board of Governors of the Federal Reserve System issued the following statement:

"Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent."



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