Fed on hold “for the time being”Contributor Global Markets Insights Strategy Team
- In a decision widely anticipated by market participants, the Federal Open Market Committee (FOMC) announced that it would maintain the federal funds rate at the current range of 0.25% to 0.50%.
- In our view, the labour market and inflation conditions support the case for increasing interest rates from the current level, as employment has increased by over 190,000 jobs per month on average this year, and core inflation sits just below the Committee’s 2% target.
- The FOMC acknowledged economic strength and progress toward its mandate, but chose “for the time being, to wait for further evidence of continued progress toward its objectives.”
Yesterday’s policy statement included dissents from three Fed presidents who would have preferred to raise the federal funds rate by 25 basis points. This was the largest number of votes against policy action since December 2014, and the growing support for a rate increase raises the likelihood that they will move in December.
The FOMC statement was accompanied with a press conference and updated economic projections. While the language of the statement was hawkish, the decrease in the projections for the federal funds rate over the next three years is dovish. This, combined with Janet Yellen’s assessment of monetary policy as only “modestly accommodative,” suggests that the Fed still intends to raise rates at a shallow pace. However, the risk of near-zero rates in a full-employment economy is runaway inflation and asset price bubbles.
EXHIBIT 1: FOMC September 2016 forecasts*
Source: US Federal Reserve, J.P. Morgan Asset Management; data as of 21 September 2016. *Forecasts of 17 FOMC participants, midpoints of central tendency except for Federal Funds Rate which is a median estimate.
In her press conference, Janet Yellen argued that the Committee is better equipped to fight a pop in inflation by raising rates than it is to fight a weakening labour market by lowering them. While the FOMC could continue to justify near-zero rates as a response to this asymmetric risk for many meetings to come, it does seem that if the Committee sees continued labour market improvement and higher inflation, they believe a rate hike in December will be warranted.