The U.S. Federal Reserve continues to be in no hurry on its expected rate hike. The Fed Open Market Committee reiterated after a two-day meeting on Wednesday that the normalization of monetary policy can be approached “patiently”. U.S. key interest rate to remain at record low of zero to 0.25 percent for now.
So far all signs point to a key interest rate increase in the summer in the USA. But the Fed is still keeping quiet. Low inflation, however, has raised doubts among experts.
Fed chief Janet Yellen had said in December that the phrase “patiently” meant that a rate hike was unlikely at the following two meetings of the Federal Open Market Committee. Thus, the central bank seems to be aiming for a change in the key interest rate in June at the earliest. Last October, the central bank stopped buying government bonds and mortgage securities as a step toward normalizing monetary policy.
Good figures from the job market had recently fed speculation that the Federal Reserve could raise interest rates earlier than expected. Unemployment rate fell to 5.6 percent in December, the lowest level since June 2008. In 2014 as a whole, 2.952 million additional jobs were created in the USA – more than at any time since 1999. The Federal Reserve on Wednesday attested to “solid” job growth in the United States. The U.S. economy is growing at a “moderate pace,” he said.
So the Fed is now more positive about the U.S. economy and labor market than before, but has kept its interest rate promise intact. The Monetary Policy Committee may proceed “patiently” in normalizing the federal funds rate, the interest rate decision communique said today, as it had the previous month.
The Fed, in its latest commentary on the rate decision, removed the previous addition that rates would remain near zero for “a considerable time” after the bond purchases ended last October. The Fed had inserted the notion of patience into its December rate meeting message. When asked how this should be interpreted, Yellen had specifically said a rate hike was unlikely at the January and March meetings of monetary watchdogs.
The Fed continues to hold its key interest rate at the zero bound. For six years now, the “fed funds rate” has been in a range of zero and 0.25 percent. The market has so far expected the first key interest rate hike since summer 2006 in mid-2015. However, individual experts have shifted their expectations slightly backwards since the beginning of the year due to a weaker inflation trend. The slump in oil prices has recently dampened inflation. For example, the inflation rate in December had fallen to its lowest level since October 2009.
The money guardians assume that the inflation rate in the USA will approach the two percent mark in the medium term. In the short term, however, it is likely to fall further due to the sharp drop in energy prices. The Fed bases its monetary policy on the core rate of inflation, which does not include energy prices.
The Fed took its decisions presented on Wednesday unanimously. Central bankers gave a more positive assessment of economic developments and the situation on the U.S. labor market than before. The economy is growing at a “solid” pace, whereas the monetary watchdogs had recently spoken of a “moderate” pace. The situation in the U.S. labor market has continued to improve, and job creation is “strong”. Most recently, the Fed had still rated job creation as “solid”.
U.S. stocks fell immediately after the Fed statements, but subsequently recovered somewhat.