Wednesday, December 16, 2015

U.S. Fed raises rate 25 bps, first rate change in 7 years

    The Federal Reserve, the U.S. central bank, raised its benchmark federal funds rate by 25 basis points to 0.25 percent to 0.50 percent - its first change in rates in exactly seven years - saying there has been a "considerable improvement in labor market" and that it is "reasonably confident" that inflation will rise.
    The Fed, which last changed its rate on Dec. 16, 2008 when it was cut to zero to 0.25 percent in the depth of the global financial crises, added that its stance remains accommodative and supports further improvement in the labor market and a return to its 2.0 percent inflation target.
    "Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent," said the Fed's policy making arm, the Federal Open Market Committee (FOMC).
    The last time the FOMC raised the fed funds rate was in July 2006 when it was raised to 5.25 percent before the Fed in September 2007 - when credit markets were starting to seize up - embarked on a series of nine rate cuts, culminating in the December 2008 cut.
    The Fed said the future path of the fed funds rate would depend on the economic outlook and data in order to assess "realized and expected economic conditions" relative to its twin objectives of maximum employment and 2 percent inflation.
    However, it also expects that economic conditions - specifically the current shortfall of inflation from its goal - will evolve in a manner that "will warrant only gradual increases" in the policy rate and it will remain "for some time" below levels that are expected to prevail in the longer run.
     In its latest economic projection, the projection for the fed funds rate at the end of 2016 was unchanged from the September forecast at 1.4 percent, implying four rate hikes each of 25 basis points, but slightly lower at 2.4 percent in 2017 compared with the previous 2.6 percent.
    For 2018 the fed funds rate was seen ending the year at 3.3 percent, down from September's forecast of 3.4 percent.
    The Fed's preferred inflation gauge, the personal consumption expenditure index, rose by an annual 0.1 percent in October from a decline of 0.1 percent in the previous month. But core inflation, which excludes food and fuel, was up by 2.0 percent in November from 1.9 percent in October.
     The Fed forecast that PCE inflation would average 1.6 percent in 2016, down from its September forecast of 1.7 percent, but then rise to 1.9 percent in 2017 and 2.0 percent in 2018.
    In today's statement, the FOMC said the underutilization of labor resources has "diminished appreciably" since early this year, compared with its October statement when it only said that the underutilization had "diminished."
    Although the U.S. unemployment rate was steady in November from October at 5.0 percent, it was the lowest rate in more than 7 years.
    The FOMC, which was unanimous in the decision to raise the rate, took comfort in the recent calm in international financial markets, saying the risks to the outlook for economic activity and the labor market were "balanced," a more positive view than in October when it said the risks were "nearly balanced" and it was monitoring global economic and financial developments.

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



"Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

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 continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected 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 monitor inflation developments closely.

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, 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; 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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