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Wednesday, November 19, 2014

Federal Funds Rate Likely to be Maintained for a “Considerable Time”

Some Federal Reserve board members opined that the language used in the statement, which indicates that the current target range for the federal funds rate would likely be maintained for a “considerable time” after the end of the asset purchase program, should be eliminated, the minutes of the Federal Open Market Committee meeting of October 28-29 revealed. Nonetheless, the phrase “considerable time” was used in the Committee’s press conference in October, as other Committee members thought the phrase was useful in communicating the Committee’s policy intentions. Committee members noted that the removal of this language might be seen as signaling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions. The Committee agreed to maintain the target range for the federal funds rate at 0% to 0.25%.

In October, the FOMC concluded its open-ended bond buying program associated with QE3, completing the tapering of purchases that it began last December. All members but one supported the conclusion of the asset purchase program and maintaining and exiting policy of reinvesting principle payments from its holdings of agency debt and agency MBS.

With regard to the state of the economy, most of the FOMC meeting participants agreed that economic activity continued to expand at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. Inflation, which participants expect may be held down in the near term by lower energy prices and other factors, is expected to move toward the Committee’s 2% goal in coming years. However, some Committee members expressed concern that inflation might persist below the Committee’s objective for quite some time.

Notably, FOMC staff revised down projections for real GDP growth a little over the medium term in response to a further rise in the foreign exchange value of the dollar, deterioration in global growth prospects and a decline in equity prices. But even with this forecast of slower expansion, real GDP is still expected to rise faster than potential output in 2015 and 2016.

Read the FOMC minutes.

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