Wednesday, November 1, 2017

US Fed holds rate, says economy rising at "solid rate"

      The Federal Reserve kept its target range for its key federal funds rate at 1-1.25 percent, as widely expected, but sounded more upbeat about economic activity despite disruptions from recent hurricanes in Texas, Florida and Puerto Rico, signaling it is likely to stick to its plan and raise the rate in December.
       The U.S. central bank, which has raised the fed funds rate four times since beginning its tightening cycle in December 2015, said economic activity had been "rising at a solid rate despite hurricane-related disruptions" as compared with its September statement when it said economic activity had been "rising moderately" this year.
        And while employment dipped in September due to the hurricanes, the Fed noted the unemployment rate had declined further as the labor market continued to strengthen.
        As in its previous statement, the Fed's policy-making arm, the Federal Open Market Committee (FOMC) said household spending had been expanding at "a moderate rate" while growth in business investment had been picking up in recent quarters.
        But despite a boost to inflation in September from higher gasoline prices in the aftermath of the hurricanes - which led to a shutdown of refineries in the Gulf coast - the Fed said inflation for other items than energy and food had "remained soft" and inflation continues to run below 2 percent, the Fed's target.
      "Near-term risks to the economic activity outlook appear roughly balanced, but the Committee is monitoring inflation developments closely," the FOMC said, re-iterating its September statement.
       In September the FOMC forecast that it would raise its fed funds rate one more time this year, following two hikes earlier this year. Next year it expects to raise the rate another three times.
       Increased optimism about economic activity since September indicates the Fed will stick to this rate path, with the next meeting of the FOMC scheduled for Dec. 13. As in recent months, the FOMC was unanimous in today's policy decision.
       "Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term," the Fed said.
       With gradual adjustments in its monetary policy, the Fed still expects the U.S. economy to continue to expand at a "moderate pace," with inflation remaining below 2 percent in the near term but then stabilizing around its objective in the medium term.
       While U.S. headline inflation rose to 2.2 percent in September from 1.9 percent in August on higher energy prices, the Fed's preferred gauge, the personal consumption expenditure index, only rose 1.6 percent and core PCE (less food and energy) was up 1.3 percent.
        Gross Domestic Product expanded by an annual rate of 2.3 percent in the third quarter of this year, up from 2.2 percent in the second and 2.0 percent in the first quarter.
        The U.S. unemployment rate fell to 4.2 percent in September, the lowest since February 2001.
        In September the FOMC forecast growth this year of 2.4 percent this year, up from the June forecast of 2.2 percent. In 2018 growth is seen easing to 2.1 percent and then to 2.0 percent in 2019.


       The Federal Reserve issued the following statements:
        

"Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year 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. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, 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.
The balance sheet normalization program initiated in October 2017 is proceeding.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Randal K. Quarles."

     The Federal Reserve also issued a statement about policy implementation:

"The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on November 1, 2017:
  • The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 1.25 percent.
  • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
    "Effective November 2, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1‑1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
    The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion. Small deviations from these amounts for operational reasons are acceptable.
    The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
  • In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 1.75 percent.
This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York's website."




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