The U.S. Federal Open Market Committee has decided to stand pat on interest rates, according to this afternoon’s press release.
Following a two-day meeting, the committee’s indicated its main goal is still “to support continued progress toward maximum employment, and price stability.”
The release shows the committee has “reaffirmed its view that the current 0% to 0.25% target range for the federal funds rate remains appropriate, [and] in determining how long to maintain this target range, the committee will assess [economic] progress—both realized and expected—toward its objectives.”
Based on current trends, “the committee anticipates […] it likely will be appropriate to maintain the 0% to 0.25% target range for the federal funds rate for a considerable time following the end of its asset purchase program,” which is still slated to occur this month.
“However, if incoming information indicates faster progress toward [those] objectives, […] then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later.”
Further, “the committee anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels [viewed] as normal in the longer run.”
FOMC’s comments fall in line with analyst expectations, but CIBC economist Andrew Grantham suggests in follow-up commentary that investors can start reading between the lines. He says, “A few minor tweaks to the Fed’s statement suggests they’re becoming slightly more optimistic regarding the [U.S. employment] outlook,” given it’s changed its wording regarding the labour market.
Rather than state “there was a ‘significant’ underutilization of labor resources,” he adds, “they’ve instead [said] that the underutilization of resources was gradually ‘diminishing’.”
However, notes Grantham, “the wording on inflation was little changed, resulting in only one dovish dissent from [economist Narayana] Kocherlakota who want[s] the Fed to promise to keep the funds rate low until the inflation outlook return[s] to 2% and wanted to continue QE as well.”
Overall, the Fed hasn’t dropped its “promise that rates will remain low for a ‘considerable period’ after the end of QE. [And], as widely expected, QE3 was wound up at this meeting, with the remaining $15 billion a month of purchases to be reduced to zero.”
So, Grantham predicts markets have already priced in this news and they’ll be little reaction from investors.