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From Banking and Finance Law Daily, September 17, 2015

FOMC stays the course; ‘funds rate’ unchanged

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in late July 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 earlier declines in energy and import prices 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 activity “is expanding at a moderate pace.” The labor market has continued to improve, “with solid job gains and declining unemployment.” Moreover, labor market indicators show that underutilization of labor resources “has diminished since early this year.” In addition, household spending and business fixed investment have been “increasing moderately,” and the housing sector has “improved further.” At the same time, however, net exports “have been soft.”

The FOMC further observed that inflation “continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports.” Further, 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. The FOMC noted that it is “monitoring developments abroad” as well.

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.”

The FOMC 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 percent objective over the medium term.” 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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