Fed says existing rate should continue to strengthen labor market

The Federal Open Market Committee kept the federal funds rate at 1% to 1.25% on Wednesday (July 26). The existing rate is “accommodative” and is expected to support more strengthening in the labor market and a return to 2% inflation, according to the Federal Reserve.

Since the committee met in June, the labor market has continued to strengthen, and economic activity has been rising, according to the Federal Reserve. The number of jobs has risen, the unemployment rate has fallen. “Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2%.”

In the short term, inflation is expected to remain below 2% but should reach the committee’s goal of 2% in the medium term. The committee will reassess the federal funds rate in order to reach its objectives of “maximum employment and 2% inflation,” according to the Federal Reserve. Gradual increases in the rate are expected as economic conditions evolve. “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.”

The committee is also keeping its existing policy to reinvest principal payments from its agency debt holdings and mortgage-backed securities in agency mortgage-backed securities. It also will continue to roll over maturing Treasury securities at auction.

The committee will meet again in September.