Fed delays rate hike amidst an economic downturn

19 March 2015

The US Federal Reserve on Wednesday decided to extend the current neutral stance, at least for the short term, after the Federal Open Markets Committee decided to continue with the present 0.25 per cent interest rate ceiling for federal funds amidst a downturn in economic growth and low inflation expectations.

''To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 per cent target range for the federal funds rate remains appropriate,'' an FOMC statement on Wednesday said.

The Fed committee said it will assess the progress toward its objectives of maximum employment and 2 per cent inflation before determining how long to maintain this target range.

The committee said its assessment will be based on a range of information, including labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The FOMC noted there was a further improvement in labor market conditions, with strong job gains and a lower unemployment rate, adding that labor market indicators suggest a diminishing trend in underutilisation of labor resources.

A moderate increase in household spending coupled with declines in energy prices have boosted household purchasing power, the committee said, adding that business fixed investment is also advancing, although recovery in the housing sector remains slow and export growth has weakened.

''The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced.''

The committee said an increase in the target range for the federal funds rate is unlikely at the April FOMC meeting, adding that it will have to wait till a further improvement is seen in the labour market and inflation can be reasonably expected to move back to its 2 per cent objective over the medium term.

Also, the Fed committee said that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.

 search domain-b