|01-29-2015, 02:20 AM||#1|
Fed remains `patient` on rates and buoyant on growth, but alert on inflation
The U.S. Federal Reserve maintained its commitment not to raise short-term interest rates before mid-year and made more room for further debates that could lengthen the time before deciding on hiking rates.
The Fed kept its pledge to be “patient” on increasing short-term interest rates, and also raised its assessment of the economy and the labor sector, though it showed caution on inflation.
The Federal Open Market Committee (FOMC) “judges that it can be patient in beginning to normalize the stance of monetary policy,” the Fed’s said Wednesday after the end of the two-day monetary policy meeting.
“Economic activity has been expanding at a solid pace,” the Fed said, which marked an upgrade from the “moderate” pace the Fed signaled at the end of 2014. The FOMC also noted “strong job gains” and a better employment conditions.
Note that since the December meeting, the Fed took in news that the economy expanded at a 5% annual rate in the third quarter, the most in over 11 years. The December jobs reported showed unemployment had fallen further, and the economy witnessed its largest annual job-gain since 1999.
The first mandate for the Fed, full employment, is close to be achieved. The statement however included a fresh communication regarding inflationary worries, the second Fed mandate.
The Fed said market-based inflation-compensation measures have substantially declined in the last few months, referring to instability in Treasury Inflation Protected Securities (TIPS) markets.
When TIPS compensation falls, -as they have been doing, it indicates that investors have expectations of lower consumer prices.
Market-based 5-year inflation expectations have fallen to the lowest level since 1999, with the Fed’s preferred inflation measure, the personal consumption expenditures lagging below the 2% target for 31 months now. PCE rose 1.2% in November from the year before.
Policy makers said inflation “is anticipated to decline further in the near term,” adding that price gains are likely to “rise gradually toward 2 percent over the medium term” as transitory effects of low energy prices dissipate.
The recent rout in oil prices, although it has proved to be a blessing for households and for some companies, they still signal a prolonged period of low inflation.
The statements was approved in a unanimous 10-vote by FOMC members, marking the first time since June.
The next FOMC meeting is expected to be very eventful. The committee will release updated forecasts for interest rates, unemployment and inflation rates, and most importantly, the committee will need to give wording on whether to officially set the stage for a June rate-hike.
The Fed could change or even remove the patience communication from the statement.
And until then, the Fed’s calculations could change in a different direction. This was only the first meeting after the European Central Bank (ECB) announced its own expanded quantitative easing program.
Also, several central banks around the world have took measures to ease monetary conditions in their respective countries to fight inflation and growth issues.
This all could pile up in the June meeting, where the real debate is likely to be.
The U.S. dollar marched higher against major currencies after the release of the statement, and U.S. stocks and Treasury yields fell.
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