DECEMBER 15 & 16: FED BEGINS STIMULUS PULLBACK BUT PATH TO BE GRADUAL

The FOMC voted to keep policy rates near zero.

 

FOMC Meeting	Directive	Vote	Fed Funds Target	Discount Rate	Guidance on Fed Funds
Dec. 15‑16	Lifts funds target	10 to 0	0.25 to 0.50%	1.00	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.
Oct 27‑28	no change	9 to 1	0.0 to 0.25%	0.75	The FOMC will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to target over the medium term.
Sep 16‑17	no change	10 to 0	0.0 to 0.25%	0.75	The FOMC will assess progress--both realized and expected--toward 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 anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Jul. 28‑29	no change	10 to 0	0.0 to 0.25%	0.75	The FOMC will assess progress--both realized and expected--toward 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 anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Jun. 16‑17	no change	10 to 0	0.0 to 0.25%	0.75	The FOMC will assess progress--both realized and expected--toward 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 anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

 

THE FED’S NEXT MOVE:

Next FOMC meeting is scheduled for January 26 & 27.

 

 

FOMC STATEMENT KEY POINTS

• Lifts policy interest rate range to 0.25 percent from 0.50 percent from zero to 0.25 percent.
• U.S. economic growth still described as moderate but the labor market is now described as having shown "further improvement."
• Keeps specific warning that it is monitoring global markets and economies.
• Still data dependent but expects to gradually raise rates over a long period of time.
• Still expects inflation to gradually increase towards 2 percent as the transitory effects of both lower import and energy prices fade.
• Raises discount rate by 25 basis points to 100 basis points and raises interest on excess reserves by 25 basis points to 0.50 percent.

 

 

FOCUS OF POLICY REMAINS ON DUAL MANDATE AND MANAGING BALANCE SHEET

 

• Fed policy remains data dependent which ties any future rate hikes to strength in the labor market and improvement in inflation.
• The Fed made no change in its policy of reinvesting principal payments from its Treasuries and mortgage-backed securities. High asset levels from the prior policy of quantitative easing will remain and will help keep mortgage rates low and possibly make riskier investments (non-Treasuries) more attractive.
• There is no specific guidance on how or when unwinding of the balance sheet will take place.
• Despite the December liftoff, the Fed expects rates to remain exceptionally low for some time even after employment and inflation near the FOMC's objectives. These objectives are described as full employment and 2 percent inflation. 

 

ECONOMY

 

• The Fed, in line with prior statements, describes economic growth in its December statement as moderate.
• Job growth is upgraded with underutilization of labor rescources now described as having diminished "appreciably" since early this year.
• Assessment of household spending and business investment unchanged with both described as solid.
• Housing still described as improving with net exports still described as soft.
• Inflation still soft but expectations remain for pressures, based largely on rising economic growth, to emerge in the medium term.