Banking and Finance Law Daily FOMC allows for slight inflation to maximize employment; ‘funds’ rate unchanged
Wednesday, September 16, 2020

FOMC allows for slight inflation to maximize employment; ‘funds’ rate unchanged

By Thomas G. Wolfe, J.D.

Given the economic challenges associated with the coronavirus pandemic, the Fed is committed to "using its full range of tools" to promote maximum employment and price stability while allowing for a slight increase in inflation.

Based on developments in connection with COVID-19 and on economic information it has received since it last met in late July, the Federal Open Market Committee decided, in an 8-2 vote, to maintain the target range for the federal funds rate at the current zero- to 0.25-percent level. The FOMC communicated that while it still "seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run," the Committee "will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent." In promoting employment objectives, the FOMC is striking a delicate balance on allowing for a slight increase for inflation, and the Committee "expects to maintain an accommodative stance of monetary policy until these outcomes are achieved."

In addition, over the coming months, the Federal Reserve "will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses," the FOMC noted.

U.S. economic outlook. The FOMC reported that the path of the economy "will depend significantly on the course of the virus." Further, the "ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

Generally, economic activity and employment have "picked up in recent months but remain well below their levels at the beginning of the year." At the same time, "[w]eaker demand and significantly lower oil prices are holding down consumer price inflation." On the whole, financial conditions "have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses," the FOMC stated. In communicating its economic outlook, the Committee released charts and tables depicting its economic projections.

In evaluating future monetary policy, the Committee "would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals." This assessment will take into account "a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."

Funds rate; discount rate. In deciding to keep the target range for the federal funds rate at the current zero- to 0.25-percent level, the FOMC expects that "it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."

In connection with the primary credit "discount" rate, the interest rate charged for short-term credit extensions to depository institutions, the Federal Reserve Board voted unanimously to maintain the primary credit rate at its existing level of 0.25 percent. In mid-March, the Fed slashed the discount rate by 1.50 percentage points to its current 0.25-percent level, which previously took effect March 16.

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