FOMC: Fed Policy to Remain Accommodative Through Late 2014

12:40PM Jan 25, 2012
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The Federal Open Market Committee (FOMC) said that since it last met in December, "the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable."

Looking forward, the committee expects economic growth in the coming quarters to be "modest," and for that reason it anticipates "the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate." Inflation, on the other hand, is expected to remain at levels "at or below" those consistent with its mandate. The committee also notes that global financial strains persist, and that these "continue to pose significant downside risks to the economic outlook."

In the interests of stronger economic recovery and maintaining low inflation levels, the committee intends to maintain a "highly accommodative stance for monetary policy," which includes keeping its target range for federal funds rate at 0% to 0.25%. The committee anticipates that economic conditions will likely warrant that this rate remain at "exceptionally low levels ... at least through late 2014."

The Committee will continue its program to "extend the average maturity of its holdings of securities as announced in September," and it will maintain its "existing policies 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." These holdings will be regularly reviewed and the size of composition of them will be adjusted "as appropriate to promote stronger economic recovery in a context of price stability."

PF Perspective: The FOMC statement provided few surprises, with the Fed hinting at a third round of quantitative easing without committing to it or providing further definition. The Fed did extend its timeline for keeping federal funds rates low from mid-2013 to late-2014. The commodities markets reacted positively to the statement while the U.S. dollar index softened.