Wednesday, December 17, 2014

Fed Funds Rate Will Likely Rise in 2015

The FOMC reaffirmed its view that the current zero to 0.25% target range for the federal funds rate remains appropriate for a “considerable time.” The committee noted that, “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”

In the press conference, Chair Janet Yellen noted that almost all participants believe that it will be appropriate to begin raising the federal funds rate in 2015, and move toward the long-run objective of by 2017. The Committee’s forecasted median long-run federal funds rate is currently 3.75%.

In her remarks, Chairwoman Yellen said that the FOMC is unlikely to commence the normalization process of the federal funds rate for at least the next couple (2) meetings. She reiterated that the normalization is based on incoming information from economic indicators.

Chair Yellen noted that the effect of declining oil prices, on net, is positive for the U.S. economy. She said that the lower oil prices act like a tax cut, boosting consumer spending power. She also noted that the Committee sees the downward pressure on headline inflation from declining energy prices as transitory, and that they expect inflation to move back up toward their 2% objective over time.

The FOMC expects the economy to continue expanding at a moderate pace. Labor indicators are expected to move toward the Committee’s long-run objective, as the “underutilization of the labor resources continues to diminish.” However, Yellen noted that there continues to be room for further improvement in the labor market. Inflation has continued to run below the Committee’s long-run objective of 2%, partly reflecting decline in energy prices, but inflation is expected to rise toward the 2% objective “as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” However, the Committee currently anticipates that, even after inflation and employment are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below what the Committee considers the long-run norm.

The Committee will maintain accommodative financial conditions by continuing the existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction.

Read FOMC press release.
See Economic Projections.

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