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Wednesday, August 20, 2014

Fed Funds Rate Hike Will Be "Relatively Prompt"

The Federal Reserve could begin raising the federal funds rate earlier than anticipated, according to the minutes released today from the July 29-30 Federal Open Market Committee meeting. The minutes also revealed that interest paid on excess reserves will be the primary tool that they use to move the Federal Funds rate.

The Federal Reserve will end its asset purchase program following the October meeting, and may begin to raise interest rates more quickly than it had initially anticipated. The FOMC minutes note that, “Labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

The minutes also stressed that some FOMC members, “Viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term.” Given a previous statement by Janet Yellen, the markets assumed the Federal Reserve would begin rate hikes 6 months after tapering ends, around April of next year. However, rate hikes may occur sooner than originally thought.

Moreover, the minutes reveal the tool the Fed plans to use to normalize rates. “Participants agreed that adjustments in the IOER rate would be the primary tool used to move the federal funds rate into its target range and influence other money market rates.”

The FOMC plans to provide the public more information later this year in regards to monetary policy normalization. Upon the release of the minutes, stocks generally dipped and the dollar increased.

Read the FOMC minutes.

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