Banking and Finance Law Daily Economic activity grows at solid rate; ‘funds’ rate unchanged
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Wednesday, May 1, 2019

Economic activity grows at solid rate; ‘funds’ rate unchanged

By Thomas G. Wolfe, J.D.

Indicating that economic growth in the United States is now rising at a solid rate, compared to the slower pace evident during the winter of 2019, the FOMC decided to maintain the federal funds rate at its present level.

Based on information it has received since it last met in March, the Federal Open Market Committee noted that the labor market "remains strong," and that economic activity "rose at a solid rate." In addition, the FOMC unanimously decided to maintain the federal funds rate at the 2.25-percent to 2.50-percent range. "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes," the FOMC stated.

Economic outlook. The FOMC reported that the growth of household spending and business fixed investment "slowed in the first quarter." At the same time, job gains have been "solid, on average, in recent months," and the unemployment rate has "remained low." Further, on a 12-month basis, overall inflation and inflation for items other than food and energy have "declined and are running below 2 percent," the Committee said. On balance, market-based measures of inflation compensation have "remained low" in recent months; meanwhile, survey-based measures of longer-term inflation expectations "are little changed."

The FOMC continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes.

Balance sheet normalization. In connection with normalizing the size of the Federal Reserve’s securities holdings and the level of reserves in the banking system, the FOMC provided details at its prior March 2019 meeting about the size of the Fed’s "securities holdings and the transition to the longer-run operating regime." Generally, the Committee intends to slow the pace of the decline in reserves over the coming quarters—provided that the economy and money market conditions "evolve about as expected."

Federal funds rate. In keeping with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the FOMC decided to maintain the target range for the federal funds rate at the 2.25- to 2.50-percent level. In connection with future determinations of the timing and size of an adjustment to the target range, the Committee "will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective." 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."

Primary credit rate. The primary credit "discount" rate is the interest rate charged for short-term credit extensions to depository institutions. As reflected in its May 1, 2019, "Decisions Regarding Monetary Policy Implementation," the Fed voted unanimously to approve keeping the primary credit discount rate at the 3-percent level, which previously took effect Dec. 20, 2018.

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