Wednesday, July 27, 2016

U.S. Fed holds rate but George returns to hawkish stance

    The central bank of the United States left its benchmark federal funds rate steady at 0.25-0.50 percent, as widely expected, but Ester George, president of the Kansas City Fed, voted to raise the rate by 25 basis points, reflecting an improvement in the economic outlook.
     The dissent by George is hardly a surprise and comes after she earlier this month said low rates were creating risks and welcomed the rebound in hiring in June, and that the issues surrounding Britain's decision to leave the European Union were more of a long-term concern.
     George already voted to raise the rate in March and April but then joined the majority in June by agreeing to keep the fed funds rate steady.
    In December last year the Fed raised its rate for the first time since July 2006 and last month it forecast that the fed feds rate would average 0.9 percent this year, implying two rate hikes this year.
    In its statement, the Federal Open Market Committee (FOMC) noted that "near-term risks to the economic outlook have diminished," a more upbeat view than in June when the Fed's policy-making body said it "continues to closely monitor inflation indicators and global economic and financial developments," a clear reference to uncertainty over Brexit.
    The FOMC also said the "labor market strengthened" and "job gains were strong in June" as economic activity expanded at a "moderate rate," a stark contrast to its statement from last month when it said the pace of improvement in the labor market slowed and job gains diminished.
   U.S. employers added 287,000 workers in June, the most since last October, in contrast to May when only 11,000 jobs were added.
    Inflation is still seen remaining low in the near term, partly due to past declines in energy prices, but then rising toward the Fed's 2.0 percent target in the medium term as the impact of the fall in energy prices dissipates and the labor market strengthens further.
    U.S. consumer price inflation was steady at 1.0 percent in June from May while the unemployment rate rose to 4.9 percent from 4.7 percent. The U.S. Gross Domestic Product grew by an annual rate of 2.1 percent in the first quarter of this year, up from 2.0 percent in the previous quarter.

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

"Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most 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 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 past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. 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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