During its January meeting, the Fed kept interest rates constant while continuing to closely monitor the markets. According to the latest policy statement on Wednesday, as was expected, the Fed’s fund rate was maintained at 0.25 to 0.50%.
The federal open markets committee (FOMC) on Wednesday released a statement in which it said that “we are closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
This statement further established that the late period of last year was marked by slowing economic growth. This brought a shift from the deeply rooted hawkish language that was deeply rooted and confirmed concerns that the economy was growing at a restrained pace. The Fed is however optimistic that the gradual increment of rates would be successful in achieving a strong labour market and support the economy as well.
When asked about their opinion on inflation, the Fed reiterated that it anticipates low energy prices to make its 2% target a hassle to attain in the “near term”. They however, believe that there will be some acceleration over the medium term.
Soon after the statement, stocks fell. The drop saw the Dow go down by more than 100 points after remaining flat just before the update. The future expectations of interest rates normally depicted by the return on the two-year treasury note fell by five basis points hitting as low as 0.841%.
Available information since the Federal Open Market Committee met in December depicts the labour markets conditions were inverse to economic growth even as it slowed late last year. Recent months have seen a moderate rate of increase in household spending and fixed business investment. The housing sector marked its best improvement as opposed to net exports which remained soft as inventory investment slowed down.
The analysis of various and recent market indicators, for example strong job gains pointed to the fact that an extra decline in under-utilisation of labour resources had been created. The Committee’s 2 percent longer-run objective has been achieved with inflation continuing to run below it. This has been observed to be the result of declining energy prices and prices of non-energy imports.
Owing to the current economic environment, the Committee has opted to retain the target range for the federal funds rate at 1/4 to 1/2 percent. The approach of monetary policy still remains accommodative, facilitating further improvement in labour market conditions and a return to 2 percent inflation.
According to the Committee, it will be retaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities while maturing Treasury securities will be rolled over at auctions. The Committee hopes to stick unto this until normalcy of the federal funds rates’ level is restored. According to this policy, they aim to achieve accommodative financial conditions by keeping the Committee’s holdings of longer-term securities at sizable levels.