Wednesday, July 26, 2017

US Fed maintains rate to ensure return to 2% inflation

     The U.S. Federal Reserve kept its benchmark federal funds rate at 1 - 1.25 percent and reiterated that its monetary policy stance remains accommodative to support a further strengthening of the labor market and thus a sustained return to 2 percent inflation.
      The Fed, which has raised its rate twice this year by a total of 50 basis points, largely repeated its view from June that the labor market had continued to strengthen while economic activity was rising "moderately" so far this year, with solid job gains and declining unemployment.
      However, inflation, both headline and excluding food and energy, remains below the Fed's 2.0 percent objective.
       The only real change to its statement from June concerns the Fed's plan for reducing its massive balance sheet. The Fed's balance sheet has risen to some $4.5 trillion since the global financial crises due to its purchases of U.S. Treasuries and housing-related debt to help hold down long-term interest rates and aid economic recovery.
       In today's statement, the Federal Open Market Committee (FOMC) - the Fed's policy-making arm - said it was maintaining its policy of reinvesting principal payments from its holdings of securities "for the time being," a slight change to its previous statement when it said that it was "maintaining its existing policy."
       Importantly, however, the Fed added it "expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated," a change from last month when it said that it would begin the process of normalizing its balance sheet "this year."
       Last month the FOMC outlined its plan for slowly reducing reinvestments from principal payments from its securities and said today that it would follow those plans.
      The Fed also reiterated that the risks to its economic outlook were roughly balanced and it was monitoring inflation closely.
      While the U.S. unemployment rate declined to 4.4 percent in June - a level that is largely seen as around full employment - headline inflation remains low and fell for the fourth month in a row to 1.6 percent in June, the lowest since October last year and further away from the Fed's objective due to lower gasoline prices.
       Meanwhile, the U.S. economy grew 2.1 percent year-on-year in the first quarter of this year, up from 2.0 percent in the previous quarter and the third consecutive quarter of accelerating growth.
      The U.S. dollar has been trending lower all year against the euro in light of improving growth prospects in Europe along with stronger global growth that is encouraging U.S. investors to move out of the dollar and into foreign currencies.
      The dollar was trading at 1.16 to the euro today, down 9.5 percent this year.
      The members of the FOMC were unanimous in today's decision, as in February and May, when it maintained its rate. In March and June, when the fed funds rate was raised, Minneapolis Fed President Neel Kashkari dissented and voted to keep the rate steady.

      The Federal Open Market Committee issued the following statement:

     "Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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.
For the time being, 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. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell."


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