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From Banking and Finance Law Daily, March 18, 2015

FOMC anticipates inflation remaining low before rising gradually; ‘funds rate’ unchanged

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in late January 2015, the Federal Open Market Committee states that while inflation is anticipated to “remain near its recent low level” in the near term, the Committee expects inflation to “rise gradually” toward 2 percent over the medium term “as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” While the FOMC will continue to monitor inflation developments closely, the target range for the federal funds rate remains unchanged.

Economic outlook. The FOMC reported that economic growth “has moderated somewhat.” Labor market conditions have “improved further, with strong job gains and a lower unemployment rate.” Moreover, labor market indicators generally suggest that underutilization of labor resources “continues to diminish.” In addition, household spending “is rising moderately,” and “declines in energy prices have boosted household purchasing power.” Meanwhile, business fixed investment “is advancing,” while recovery in the housing sector “remains slow” and export growth “has weakened.”

The FOMC further observed that inflation “has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices,” and that while market-based measures of inflation compensation “remain low,” survey-based measures of longer-term inflation expectations “have remained stable.” Accordingly, while the FOMC continues to discern the risks to the outlook for economic activity and the labor market as “nearly balanced,” the Committee expects inflation to “rise gradually toward 2 percent.”

In keeping with its evaluation of the economic outlook for the United States, the FOMC released charts and graphs depicting its economic projections.

Asset purchases. The FOMC communicated 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.” In the FOMC’s view, by keeping the Committee's holdings of longer-term securities at sizable levels, the policy “should help maintain accommodative financial conditions.”

Federal funds rate. Based on its current assessment, the FOMC continued to maintain the current, low-target range for the federal funds rate at 0 to .25 percent. In determining how long it will maintain this target range, the FOMC stated that it “will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” According to the FOMC, 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.”

Notably, the FOMC indicated that an increase in the target range for the federal funds rate “remains unlikely” at its next April 2015 FOMC meeting. At the same time, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen “further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.” According to the FOMC, this change in the forward guidance “does not indicate that the Committee has decided on the timing of the initial increase in the target range.”

Still, the FOMC 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 the Committee views as normal in the longer run.”

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