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Wednesday, February 18, 2015

Dovish FOMC Minutes Signals Fed Cautious on Rate Increase Timing

The Federal Open Market Committee (FOMC) minutes of the January 27-28 meeting signaled that the Fed will be cautious concerning the timing of the first federal funds rate increase and the rate of increases thereafter. Some Fed officials advised against raising the rates prematurely, noting concerns stemming from economies overseas. In particular, Fed officials pointed to slowed growth in China and the ECB announcement that it would expand its asset purchase program to include the purchase of sovereign bonds, which caused the euro to depreciate significantly against the dollar.

The FOMC settled on continuing to say that the Committee “can be patient” in beginning to normalize the stance of monetary policy. Members clarified that the decision to raise the federal funds rate would remain data dependent; faster progress towards the Committee’s dual mandate may warrant an increase in the federal funds rate sooner than anticipated, just as slower progress may justify waiting.

The Committee will continue to maintain accommodative financial conditions by reinvesting principal payments from its holdings of mortgage-backed securities and to roll over maturing Treasury securities at auction. After the first increase of the federal funds rate, Fed policy will likely remain highly accommodative for a time.

Fed officials reported that economic activity had been expanding at a solid pace, compared to the “moderate” pace at which the economy was expanding in the previous meeting. The labor market also improved from the previous meeting, as the FOMC labeled job gains as “strong” compared with “solid.” However, inflation fell further below the Committee’s long-term goal of 2%, primarily due to the decline in gas prices. The Committee notes that the low gas prices has had a positive expect for consumers by increasing their purchasing power.

Read the FOMC minutes.

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