Tag Archives: FOMC

The Fed’s Static January Press Release

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.

Low Unemployment Rates is misleading

The Federal Open Market Committee’s latest press release after its January 28 meeting reveals that it will maintain its 0% to 0.25% federal funds rate to achieve its targeted 5.2% to 5.5% unemployment rate and 2% inflation rate. The report states that economic conditions are improving, with increases in household spending and business investments. The labor market have further improved, but inflation rate have declined in light of plummeting oil prices. According to employment statistics, unemployment rates have dropped to 5.6% in December, meaning that the target unemployment rate is almost within target levels. The decline in inflation is attributed falling oil price, but this is temporary and the Committee expect that inflation will gradually rise after the transitory effects of low oil prices dissipate. The FOMC will closely monitor market conditions to determine when to raise the federal funds rate, adding that even after employment rate and inflation are near its target levels, it will keep the federal funds below normal levels in the long run. A slow but gradual increase in the federal funds rate is appropriate as it will allow the economy to slowly adjust.

The job market seems to be doing well, as unemployment rate is reaching optimal levels. However, this data is deceiving as the labor force participation rate have continued to decline.

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According to the Federal Reserve Economic Data, the civilian labor force participation rate have hit lows not seen since 1978. This reflects that more and more people are still dropping out of the work force, causing unemployment rate to decrease. While there have been job gains in the economy, the decline in participation should be of more pressing concern. This data was left out of the press release, which seemed to have been overly positive about the state of our economy. In the future, the FOMC should also include this data so to not be misleading. This also raises the question of whether we have to decrease the 5.2% to 5.5% target unemployment rate. In any case, this evidence supports the FOMC’s decision to keep the federal funds rate low, as this will facilitate economic activity.

In the near future, however, inflation will remain low, while unemployment may further decrease. Factoring in the decrease in labor force participation, it might actually be good for the unemployment rate to decrease below 5% in the short run, though this would reduce competitiveness in the job market. Which is why more emphasis should be put into increasing the labor force participation rate, and should take a higher priority in policy-making.

January FOMC meeting: No Surprises

Jan 31st 2015

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(http://www.midasletter.com/2013/07/fomc-statement-translated-130731/)

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.

Get Zero Interest Rates Till June!

The Fed held its FOMC meeting this past Tuesday and Wednesday, January 27th to the 28th of 2015, discussing several different aspects of monetary policy to “foster maximum employment and price stability.” Lately, there has been a lot of talk about a rumored interest rate increase that is forecasted to occur sometime this year. Fortunately, the Fed has decided to leave interest rates where they are on account of the falling inflation rates throughout the US, for which they listed several reasons. They spoke on the falling oil prices, the ECB’s decision to buy over a trillion Euros worth of bonds, and the dollar’s appreciating value. Ultimately, interest rates are still expected to increase in June of this year, and many still fear this day.

A USA Today article titled “Fed likely to continue to signal mid-2015 rate hike” states “The Fed typically raises interest rates to keep inflation from spiraling too high as the economy and labor market heat up and lowers rates to spur growth. The unemployment rate has fallen from 6.7% to a near-normal 5.6% over the past year, providing support for adhering to Fed policymakers’ forecast for the first rate hike in June.” Should the Fed increase interest rates, many negative events may occur. The most likely result of this increase would be an immediate shock to the stock market. Investors like conditions where money is cheap, and higher interest rates mean it is effectively more expensive to borrow. The same goes for mortgages, loans, and credit. People would ultimately see a decrease in the purchasing power of their dollars, and a rise in prices everywhere. Historically, higher interest rates have been signs of an economic recession, however the Fed doesn’t have much of a choice.

Some expect that the Fed shall continue printing money and buying securities to keep interest rates artificially low. That is entirely within the realm of possibility, however eventually the Fed has to raise interest rates or inflation will devalue the dollar to a worthless status. It’s going to be a risky decision for the Fed, and had they raised interest rates a long time ago, it may have been a smarter move. Economic crashes have always occurred cyclically. Never for the same exact reason, always the same way. As with the 2008 subprime mortgage bubble, we are now faced with an even greater bubble that must be deflated. What remains to be seen is which needle the Fed chooses to use this time.

The Fed’s Latest FOMC Announcement

On January 28th, the Federal Open Markets Committee (FOMC) made its latest statement on its stance on monetary policy going forward. The Fed is committed to keeping the federal funds rate between 0 and 0.25% until their employment and inflation objectives are met. Compared to its last statement, there are a few subtle changes that will play a large role in the Fed’s decision to raise short-term interest rates in the near future.

Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.

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The Fed’s target for unemployment is fairing much better than its target for inflation. The target range for unemployment the Fed sees consistent with 2% inflation in the long run is between 5.2% and 5.5%; the current jobless rate is very close at 5.6%. However, inflation is slowing. As you can see, even after excluding food and energy prices, prices still seem to be slowing. If unemployment continues to truck lower, it would support a rate hike, but low or falling inflation would say otherwise. Until inflation seems to be stable, I don’t see the Fed raising short-term rates, given some of the other threats affecting the US economy.

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 determining whether to maintain its current course, the Fed has to consider international issues as well as domestic ones that could very well affect US growth. I believe the Fed is specifically talking about Europe in its statement. Because of slowing global growth, recent developments in Europe and the announcement of their new stimulus program, and a stronger US economy, capital has been flowing into the US and the dollar has appreciated against most foreign currencies. A stronger US dollar makes US goods more expensive to foreigners, which will probably decrease domestic exports in the near future. A stronger US dollar also makes foreign goods cheaper, which has the potential to put even more downward pressure on inflation. The possibility of slower growth and disinflation will puts the Fed in a situation where they need to keep rates lower.

The Committee currently anticipates 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.

The Fed’s statements are carefully curated so they have the flexibility to do what they believe is right for the economy at the right time. I believe the biggest mistake the Fed can make is raising interest rates too early. If they raise rates too early, economic growth will be hit at a time when we actually need lower rates and more stimulus. If the Fed waits longer, inflation could be a little higher than the long run 2% target, but the ensuing rate increase would help control inflation. The upside from putting off rate hikes greatly outweigh the downsides from raising rates too early, therefore, I suggest the Fed stay patient and continue its course until the latter part of 2015.

FOMC Changes Nothing

The Federal Open Market Committee just finished their two-day meeting on January 28th, 2015, and started off the year with a whole lot of nothing! The Committee did not make any changes or do a whole lot of revisions to their previous guidance’s. This is in grave contrast to the changes that the Swiss National Bank has done as of late. While the FOMC did still make it clear that they are still keeping the door open to the possibility of a June rate hike, Janet Yellen and the entire committee released in their statement, “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 Committee managed to say a whole 529 words without saying anything new at all. As Sarah Portlock wrote in her Wall Street Journal article, Economists React to the January Fed Statement: ‘The Door is Still Open to a June Hike’, “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.” Everyone was eagerly awaiting to hear more about their guidance on these rate hikes, but were all utterly disappointed at having to wait until they meet again to learn anything new. This spelt trouble for the stock markets as Alex Veiga reported in his article, Stocks fade late as oil dips, Fed gives investors pause, “The market had been in a wait -and-see mode in advance of the Fed statement, drifting between small gains and losses for much of the day… The market initially perked up after the Fed issued its statement at 2 p.m. Eastern Time. But the gains were short-lived, and by late afternoon three major indexes slumped, extending their losses for the year. The Dow is now 4.8 percent below its all-time high of 18,053.71 on Dec. 26. The S&P 500 index is down 4.2 percent from its high of 2,090.57 on Dec. 29.” This is due to the fact that the Fed kept in a June target to begin their rate hikes, because as interest rates go up they usually make stocks less attractive relative to bonds. Let’s hope that while the US and the FOMC had the most uneventful Central Bank meeting as of late, that Janet Yellen and her committee members truly know what is best to keep our economy humming!

 

Why Not Target on Employment Rate? (Blog9)

Federal Open Market Committee(FOMC) released its statement Wednesday night, in which claims that “To support continued progress toward maximum employment and price stability, the Committee reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate“. Given the statutory mandate of FOMC is to foster both maximum employment and price stability, what I am interested in is that why the committee usually focuses on the federal funds rate but seldom set an employment rate target.

Its official story (as well as some economics principles) is as following: Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-time interest rates, the amount of money and credit, and , ultimately, a range of economic variables, including employment, output, and prices of goods and services. However, since the ultimate goal is to rise the inflation gradually toward 2 percent (as the year of 2015) and decline the unemployment, why not simply set up an appropriate employment rate directly. And personally I think that reaching an employment rate target is much more easier (or say, controllable) compared with this “chain reaction”.

First of all, employment rate is easier to measure. The unemployment is defined when people are without work and actively seeking work, whose rate is simply the number of unemployed people divided by whole labor force. And it can be found easily through Bureau of Labor. Then the employment rate is simply one minus the unemployment rate. On the other hand, inflation is an index number, which is calculated usually through CPI (Consumer Price Index), another index number that combines prices of a basket of goods. What is more, when calculating inflation rate, we also have to take the base-year’s condition into consideration. Thus inflation is a more illusionary and imprecise indicator.

Secondly, based on the Phillips Curve, the inverse relationship between unemployment rates and corresponding rates of inflation indicates that once the employment rate is settle down, inflation rate is almost determined as well. Thus what we need to do is set up an employment rate and try to target it. And then the rest is waiting the market to decide the inflation rate ,which should not be far away from ‘normal’. Someone may argue that the inverse relationship does not necessarily mean a causality between the unemployment and inflation. Well, though it is true and the adaptive expectation theory has already pointed out the inflation is determined by the expectation, in the short term the Philips Curve still dominated.

Finally, since labor is one of the four basic factors of production(the other three are land, capital and entrepreneurship), an increase in the employment rate could indicate a real development on production(GDP). While inflation is usually considered to be connected with over-printed cash problem. Though a mild inflation is good for stimulating economic, creating jobs not only stimulating economic, but also good for social stability.

I guess one problem of targeting on employment rate instead of federal fund rate is that while setting up an employment rate is much more easier and personally thinking is much more effective for waking up the economic, reaching the goal is difficult. FOMC could target its federal fund rate through open market operation, while it is hard to create jobs for unemployment people. In this case, U.S might want to learn from China who creating some “Zipper project”, such as reconstruction buildings and rail roads, or waging foreign wars. Anyway, the key is trying variety means( we could call them  ‘open labor market operation’) to target the employment rate.