The US Federal Reserve’s open market committee decided overnight to hold its federal funds rate in the range of 1-1.25%.
It issued a one-liner on its debt reduction programme. You can check the background on that at the foot of this article.
The committee’s position, now fairly forlorn as its hope for an inflation rise keeps not happening, but with the jobs picture stronger as the unemployment rate strengthened by 0.2% in September to 4.2%: “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2% inflation.”
Below is the committee’s full statement on the US economy:
“Information received since the committee met in September indicates that the labour 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 & energy remained soft.
“On a 12-month basis, both inflation measures have declined this year and are running below 2%. 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 & price stability. Hurricane-related disruptions & rebuilding will continue to affect economic activity, employment & 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 labour market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilise around the committee’s 2% 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 realised & expected labour market conditions & inflation, the committee decided to maintain the target range for the federal funds rate at 1-1.25%. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2% inflation.
“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its objectives of maximum employment & 2% inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.
“The committee will carefully monitor actual & 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 normalisation programme initiated in October is proceeding.”
Background to “normalisation”
In its June release, the committee said it was “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt & agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
“The committee currently expects to begin implementing a balance sheet normalisation programme this year, provided that the economy evolves broadly as anticipated. This programme… would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities.”
The normalisation programme has 2 parts to it, as outlined in June:
- For payments of principal that the Federal Reserve receives from maturing Treasury securities, the committee anticipates that the cap will be $US6 billion/month initially and will increase in steps of $US6 billion at 3-month intervals over 12 months until it reaches $US30 billion/month.
- For payments of principal that the Federal Reserve receives from its holdings of agency debt & mortgage-backed securities, the committee anticipates that the cap will be $US4 billion/month initially and will increase in steps of $US4 billion at 3-month intervals over 12 months until it reaches $US20 billion per month.
On that basis, the total reduction should now be $US10 billion/month.
14 June 2017: Federal Reserve board & federal open market committee release economic projections from the June 13-14 FOMC meeting
FOMC issues addendum to the policy normalisation principles & plans
Attribution: Fed release.