Banking and Finance Law Daily FOMC expects inflation to remain low; funds rate unchanged
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Wednesday, January 27, 2016

FOMC expects inflation to remain low; funds rate unchanged

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in December 2015, the Federal Open Market Committee expects inflation to remain low in the near term, “in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.” The FOMC relates that it is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Further, the Committee decided to maintain the target range for the federal funds rate at the .25- to .50-percent range previously set in December 2015.

Economic outlook. The FOMC reported that, as it makes gradual adjustments in the stance of monetary policy, economic activity will “expand at a moderate pace and labor market indicators will continue to strengthen.” In addition, the FOMC observed that a range of recent labor market indicators, including “strong” job gains, “points to some additional decline in underutilization of labor resources.” Meanwhile, household spending and business fixed investment have been “increasing at moderate rates in recent months,” and the housing sector “has improved further.” At the same time, however, “net exports have been soft and inventory investment slowed.”

The FOMC further observed that inflation has “continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.” Further, while market-based measures of inflation compensation “declined further,” survey-based measures of longer-term inflation expectations “are little changed, on balance, in recent months.”

Statement amended. Notably, according to a Jan. 27, 2016, release, the FOMC also has reaffirmed its “Statement on Longer Run Goals and Monetary Policy Strategy” by adding an amendment to clarify that the FOMC views its inflation objective as “symmetric.” Also, the statement now contains an updated reference to participants’ estimates of the longer-run, normal unemployment rate, as depicted in the most recent “Summary of 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.” Moreover, the FOMC anticipates continuing this policy “until normalization of the level of the federal funds rate is well under way.” 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. The FOMC decided to maintain the target range for the federal funds rate at the .25- to .50-percent range set in December 2015. In connection with future determinations of the timing and size of an adjustment, the Committee “will assess realized and expected economic conditions relative to 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.”

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