FOMC: Steady Policy, But Rate Rise Case Has ‘Continued to Strengthen’

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The case to increase short-term interest rates “has continued to strengthen” but the Fed wants to see “some further evidence” that the economy is progressing toward the Fed’s goals, according to the post-meeting statement issued at the conclusion of the Federal Open Market Committee (FOMC) meeting.

Since the September FOMC meeting, the statement noted the “labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year.” While unemployment has moved little, the statement noted that “job gains have been solid.”

While household spending has been “rising moderately but business fixed investment has remained soft,” the statement noted.

Inflation increased but still below target. The increase in inflation was labeled as “somewhat” since earlier in 2016, but the statement reminded it “is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.” As it has noted previously, the FOMC said, “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 is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.”

Risks are balanced. The near-term risks to the US economy “appear roughly balanced,” the statement said. “The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Steady policy decision. The Committee “decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent,” the statement said. “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

Data will still drive the decisions ahead. “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,” the statement said. “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.”

Gradual increases are still expected. US 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Reinvesting policy still intact. “The Committee is maintaining its existing policy 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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”

Two dissenters. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action were: Esther L. George and Loretta J. Mester, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Comments: This statement is the only information the market has to go on and so far, they are concluding that there are more signs the Fed is aiming at an increase in the range of the Fed funds rate in December, even though they did not come out and explicitly say that, unlike they did during the latter portion of 2015. The statements that the case has continued to strengthen and that there was an increase in inflation are the two portions most are citing for the expectation that the Fed is looking to December for an increase in the Fed funds rate range.

As expected, the number dissenting on the steady policy action declined to two – KC Fed’s George and Cleveland Fed’s Mester. Boston Fed’s Rosengren kept the view he expressed recently – that he would be comfortable with a December rate increase.

Also absent, any reference to the elections. One would expect as consistent as Fed Chairwoman Janet Yellen was in September at saying the Fed does not consider politics, they would not have added any direct reference to the election uncertainty that has been seen in the market this week.

The bottom line remains that this Fed has set the stage – to a degree at least – that December seems most likely as the next action to increase short-term rates. But they did not come out and say that, most likely an acknowledgement that a specific mention of “by the end of the year” would have signaled to markets that their decision was calendar-based and no data driven as they have continued to insist is the case.

NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.