January FOMC meeting: No Surprises

Jan 31st 2015



Many people already expected that FOMC (Federal Open Market Committee) meeting on January 28th would avoid many changes and keep previous policies. As they predicted, the Federal Reserve said it would keep short-term interest rates near zero until the middle of the year, implicating increase of the interest rate on June. The Fed seems confident about the U.S. economic growth since job gains are strong and economic activity is expanding. “At the same time, however, the central bank hinted at wariness about low inflation, slow global growth, a stronger U.S. dollar and international market turbulence” (Wall Street Journal).

The central bank hasn’t illustrated economic activity as “solid” since the subprime mortgage, almost the end of the last U.S. economic expansion. However, according to Wall Street Journal “The Fed on Wednesday described economic growth as “solid,” which in the dry parlance of central bankers is a notably more enthusiastic assessment than in December when it described the pace as “moderate.”

Another article from the Wall Street Journal suggests various reactions of economists. “The FOMC was able to take a pass today, but the rubber will hit the road in March, when the committee will presumably need to tweak the forward-guidance language if it wants to keep a June rate move on the table,” says Stephen Stanley, Amherst Pierpont Securities. Other economists predict that there would be a June hike, depending on the labor data.

Investors and economists are saying that the FOMC meeting on January is not different from the meeting on December, focusing on whether the Fed will take an action when other central banks around the world move to lower their own interest rates and try to weaken their currencies to boost their economies. I believe eventually the Fed will try to lower its currency (US dollars) to protect the economic growth. Emerging markets such as China, Russia and Brazil have had hard time since 2008, and they are willing to improve their economies. It is obvious that devaluating their currencies to increase exports is one of the most effective ways to lift their economies.

Value of currency is not only a variable that the Fed should be cautious about. Decrease in oil price can affect on the U.S. market. Many people expect that low oil price can trigger the economic growth, leaving consumers with more disposable income. However, some experts disagree with the positive perspective. “Jeffrey Gundlach at DoubleLine Capital told investors this week falling oil prices could have many negative and unforeseen consequences. Gundlach is most concerned much of the U.S.’ economic strength stems from the improving outlook for jobs. … being gained from the U.S. energy renaissance” (USA Today).

There is no surprising announcements on January FOMC meeting. The Fed will delay its decision of raising interest rate until mid of this year and watch the market reaction. If there are no other variables which can facilitate the economic growth or recession, interest rate will be increased gradually. Hopefully, the global economy become fully recovered before the mid of this year.

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