FOMC: The economy is just not ready yet
The Federal Reserve said today that it is not going to raise the federal funds rate this month, citing the fact that the country’s economy still has not met the targets laid out by the Federal Open Markets Committee.
In a statement released Wednesday by the Fed, the FOMC members said that in an effort to “support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4% target range for the federal funds rate remains appropriate.”
The FOMC said that it is open to a rate hike at the next meeting, which is coming in December.
“The current 0 to 1/4% target range for the federal funds rate remains appropriate,” the FOMC said in its statement.
“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2% inflation,” the FOMC continued.
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” the FOMC continued. “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”
In stating that it is not ready to raise rates, the FOMC said the economic indicators are not at the target levels.
“Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft,” the FOMC said.
“The pace of job gains slowed and the unemployment rate held steady,” the FOMC continued. “Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.”
The FOMC also indicated that it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
“This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions,” the FOMC said.
According to the Fed’s statement, Jeffrey Lacker, the president and CEO of the Federal Reserve Bank of Richmond, was the sole dissenting vote.
Lacker preferred to raise the target range for the federal funds rate by 25 basis points at this meeting, the Fed statement said.
The Fed’s hesitancy to raise rates shouldn’t be a surprise, given its repeated reluctance to raise rates in previous meetings of the FOMC.
In fact, the Fed has not raised interest rates since June 2006.
Before September’s FOMC meeting, there was some speculation that the Fed could rate rates in September, but that didn’t happen.
At the time, the FOMC said “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4% target range for the federal funds rate remains appropriate.”
The FOMC also said that in determining how long to maintain this target range, “the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2% inflation.”
Many analysts saw today’s development coming.
Jonathan Smoke, chief economist for realtor.com, said earlier this week that a rate hike is not coming.
“The new home sales report covering September released today shows a rate well below the consensus estimate and indicates that real issues emerged late this summer in the new homes market, questioning the supposedly strong growth signals that were previously interpreted by many,” Smoke said. “Last year we picked up momentum in the late summer and fall. This year seems to be the opposite—we are losing momentum.”
“That decline was likely a result of the stock market declines in August and September,” he said. “If builders are not focusing on first-time buyers, they are focusing on the segments most likely to be disrupted by declines in stock portfolios and retirement plans.”
Isaac Boltansky at Compass Point Research & Trading shared Smoke’s viewpoint.
“Our view remains that there is not sufficient support for a rate increase at this meeting,” Boltansky said earlier this week.
Lindsey Piegza, chief economist at Stifel Fixed Income, agreed.
“Ahead of this week’s Fed meeting, the housing market appears to be the sole silver lining in the recovery. After all, manufacturing has been hard hit along with trade as a result of sluggish international demand and a rising US dollar,” she said. “The labor market remains sluggish amid rising global uncertainty, and consumers, as well as service activity, have lost significant momentum without income growth and a decreased willingness to finance today’s spending with tomorrow’s income opportunities that may never materialize. And we can’t forget nonexistent inflation.”