The Federal Reserve Board’s January 28 press release released no concrete timeline for when they plan to begin raising rates. The statement has a positive economic outlook, claiming that the Fed’s data since December suggests that “economic activity has been expanding at a solid pace” (http://www.federalreserve.gov/newsevents/press/monetary/20150128a.htm). Investors are analyzing this announcement closely to determine what it might imply for rate raising. The announcement reads: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy… the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”
According to Paul R. La Monica’s article for CNN Money titled “Fed stays ‘patient’ but rate hikes are coming,” economists such as Michael Gapen for Barclay’s believe the first rate hike will come in the summer (http://money.cnn.com/2015/01/28/investing/federal-reserve-statement-patient/). The announcement led to slips in the Dow Jones, the S&P 500, and the Nasdaq, with the latter falling almost 200 points.
The announcement explains that this expected stagnation is flexible to the natural timeline of recovery of the economy.
“However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”
The above sentence seems to me to have been included to give the OMC the leeway to keep decisions to raise rates flexible.Professor Kimball posted a guest blogger’s post on his blog Confessions of a Supply Side Liberal titled “Greg Shill: So What Are the Federal Reserve’s Legal Constraints, Anyway?” in which the flexibility of the Fed in making decisions on monetary policy are discussed. Shill believes “the bank has significantly more monetary policy discretion than is commonly assumed. I personally believe this expansive power is a good thing: the Fed is charged by statute with a dual mission of promoting full employment and “price stability” (http://blog.supplysideliberal.com/post/109369743080/greg-shill-so-what-are-the-federal-reserves).
All in all, this report seems to be one of unvarying progress. This could be because the Fed believes they are on the best possible trajectory or because they are confined by the Zero Lower Bound problem. Either way, I do not believe too much should be read into this announcement as I think it was meant to tell investors that the Fed will not be raising rates any time in the immediate future.