US Fed sticks to easy money policy

03 November 2016

The US Federal Reserve on Wednesday decided against an interest rate hike for the nth time in several years to leave its near-zero interest rates unchanged despite promises of ending its easy money policy that floods capital markets across the world with US funds.

Instead, the Federal Open Markets Committee (FOMC) decided to keep interest rate near-zero levels and normalise rates on the basis of inflation rate and unemployment levels the two parameters that decides Fed's interest rate policy.

The FOMC at its meeting on Wednesday decided to maintain an easy money policy with the target range for the federal funds rate at 0.25 to 0.50 per cent and give the long-promised rate hike yet another go-by.

According to the Fed committee, while the case for an increase in the federal funds rate has continued to strengthen, the committee 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 per cent inflation.

''In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. 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 per cent, the committee will carefully monitor actual and expected progress toward its inflation goal.
The committee, however, expects that 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, Fed said, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Fed said it would continue to reinvest 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, until normalization of the level of the federal funds rate is achieved.

This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

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