Fed holds interest rates at current range; adopts wait-and-see ‘accommodative’ policy

by Wesley Brown ([email protected]) 98 views 

The Federal Open Market Committee (FOMC) on Wednesday (March 16) maintained federal funds rates at 0.25% to 0.5%, with Fed Chair Janet Yellen calling the nation’s current hawkish monetary policy “prudent” given the state of the U.S. economy.

In a press conference following the FOMC’s two-day meeting in Washington, D.C., Yellen said the FOMC’s stance remains accommodative, supporting further improvement in labor market conditions and a return to 2% inflation.

“This decision partly reflects the implications for the U.S. economy,” Yellen said. “Proceeding cautiously … in the policy of accommodation at this time will allow us to verify that the labor market continuing to strengthen despite the risk from abroad. Such caution is appropriate given the short-term interest rates will stay near zero, which means that monetary policy has greater scope to respond to upside and downside changes in the outlook.”

In determining the timing and size of future adjustments to the target range for the federal funds rate in the future, Yellen said the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation target.

“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 Fed chairwoman said. “The committee expects that economic conditions will evolve in a manner that will warrant any gradual increase in the federal funds rate.”

Yellen, however, did note that 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,” she said.

Yellen’s remarks follow the third FOMC meeting after federal monetary policymakers decided on Dec. 16 to end nearly seven years of a near-zero percent rate and announce the first rate hike in more than nine years.

Yet a month ago, St. Louis Federal Reserve President James Bullard backed off the FOMC’s normalization policy, calling it “unwise” to continue the central bank’s monetary policy for continued interest rate hikes with recent declines in inflation expectations caused by declining oil prices. Bullard, one of 10 members of the FOMC chaired by Yellen, said renewed downward pressure on market-based measures of inflation expectations during 2016 has called the current policy into question.

“I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,” said Bullard, president of the expansive Eighth District, which includes Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, the eastern half of Missouri and West Tennessee.

Besides worries about the nation’s job market and inflation, some economists are also concerned that the U.S. economy has slowed considerably since the second quarter of 2015, when real U.S. Gross Domestic Product (GDP) accelerated at a robust 3.9%. In the third quarter, GDP slowed to tepid 2%

Next week, the U.S. Bureau of Economic Analysis is expected to release its third and final revised Gross Domestic Product (GDP) report for the fourth quarter. The second revision on Feb. 26 showed fourth quarter growth at a weak one percent.

Today, the Atlanta Federal Reserve’s updated GDPNow model forecast for real GDP growth in the first quarter of 2016 shows moderate growth of only 1.9%.

Link here to view video of the FOMC press conference.

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